THE RESERVE Bank of Australia has for a long time now had an uncomfortable relationship with house prices.
They quite frankly don’t know whether to cheer them on or lament them.
When the RBA cuts rates, house prices take off, which is seen as a good thing since it should increase construction activity.
The RBA also subscribes to the wealth effect, hoping people will feel more confident in spending.
But skyrocketing house prices also mean a lot more debt for new home buyers. And young people are increasingly priced out, unless parents step in and help.
Forget equal opportunity.
This week the RBA’s Dr Lowe took the opportunity in a speech to say the massive recent leap in house prices — while helped by rate cuts — really weren’t the RBA’s area.
He pointed to other government policies such as tax, planning, transport and zoning as the structural factors that were responsible.
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This of course leads to a wider discussion around whether high house prices — and asset markets in general — are good for society.
After all, the RBA’s third goal is the “welfare of the Australian people”.
This does not appear in most central banks mandates and gives the RBA scope beyond low inflation and full employment.
By setting the price of money the RBA has a huge impact on asset prices.
Of course strong asset prices are good news for asset owners — generally people in the older half of the population with homes and big super balances.
Whether this “trickles down” to significantly more spending is debatable.
It’s clear that Dr Lowe expects to see through to the end of his term in September 2023 with cash rates at zero.
He even expressed surprise why anyone would think otherwise.
Whether fiscal policy will address the widening wealth gaps is outside his control but he has no plans to use monetary policy, or at this stage even regulatory measures.
For asset owners he has our backs.
Tim Hext is a portfolio manager with Pendal’s Bond, Income and Defensive Strategies (BIDS) team.
Pendal’s BIDS boutique is one of the most experienced and well-regarded fixed income teams in Australia. In 2020 the team won the Australian Fixed Interest category in the Zenith awards.
With the goal of building the most defensive line of funds in Australia, the team oversees A$22 billion invested across income, composite, pure alpha, global and Australian government strategies.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
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