RBA would be right to taper its Quantitative Easing program

There’s a nice article by William McInnes in today’s Financial Review, Economists expect RBA to ease stimulus, which begins:

 Economists expect Tuesday’s Reserve Bank board meeting to acknowledge the economy’s surprisingly strong recovery and to signal some tapering of its $200 billion-plus quantitative easing monetary stimulus.

It would make sense to do so, given the RBA’s ultra-loose monetary policy has played a large part in encouraging massive growth in credit for housing and, hence, rapidly rising property prices (up nearly 2% in June and 15% through-the-year in Brisbane-Gold Coast according to CoreLogic). Longer-term, all the additional money in the economy will likely move on from inflating property prices to inflating consumer prices (e.g. as people spend the capital gains from properties they sell).

Here’s a chart based on the latest lending indicators data from the ABS showing just how much lending for owner-occupied housing has grown up to May 2021. New loan commitments for owner-occupied housing have nearly doubled since early 2020.

Loans for owner-occupied housing in Australia have nearly doubled since early 2020.

Here’s the same data for loans to investors, the amount of which is similar to what we were seeing during the apartment building boom in the middle of the last decade.

Loans to property investors in Australia are around levels seen during the apartment building boom in the middle of the last decade.

So, the RBA would be on firm ground if it chooses to reduce its QE (i.e. bond buying) program. It should avoid destabilising the economy through an over-heated property market and by encouraging households to take on debts which may become problematic in future years when interest rates rise.

Incidentally, here’s a good summary from Business Insider Australia on what RBA Governor Phil Lowe has previously said about monetary policy and house prices:

The RBA believes there’s no housing bubble just yet, but says it will intervene if Australians go crazy on debt

That article is from February. We should learn this week if the RBA now thinks there is a housing bubble and Australians have gone crazy on debt. It’s difficult to look at the lending and house price data and not worry a little that this is what we are seeing.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com.

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2 Responses to RBA would be right to taper its Quantitative Easing program

  1. Katrina Drake says:

    Just a couple of points;

    People selling homes don’t usually invest the capital gain on consumer goods, as they usually buy back into an inflated house market, negating any capital gain.

    The major issue, is that there are too few investment options outside of the domestic property market for investors to invest their money. Also, domestic housing shouldn’t really be considered an investment, it leads to too many unprofessional landlords.

    • Gene Tunny says:

      Thanks Katrina. Yes, that’s a fair point about the low propensity to spend out of capital gains. It’s probably not the best example of how house prices can affect consumption spending, I admit, although it’s certainly one of the channels. There’s a wealth effect on consumption and also the potential for housing equity withdrawal (i.e. using your increasingly valuable house as an ATM so to speak). There are multiple ways this could occur, as the RBA nicely indentied in a RBA Bulletin in the early 2000s:


      Re. your too few investment options point, I agree if you’re talking about property solely, but the universe of investment options is much larger than Aussie property.

      I’m unsure exactly what you’re driving at with your unprofessional landlords point. Are you making the argument that negative gearing has encouraged too many people to buy investment properties? On why negative gearing is completely logical, see my article:

      Click to access 34-1-tunny-gene.pdf

      On Mon, Jul 5, 2021 at 10:45 AM Queensland Economy Watch wrote:


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