The AFR macroprudential policy questions
Most of the editorial in the Australian Financial Review (The AFR) on 18 September 2013 called “Keeping a lid on housing prices“ seemed quite reasonable, except for the last paragraph.
The last paragraph reads,
As the RBA knows, however, resorting to such “macro-prudential” policy interventions has unfortunate echoes of the pre 1980s regulated financial system. Australia’s 1980s reform agenda began with the recognition that credit controls and the like ended up distorting the efficiency of the system. They have distributional-and hence political-implications too, as higher loan-to-valuation requirements would further lock out first home buyers. Australia needs to be very wary of going down this back-to-the-future path.
Let’s start with the distributional/political implications. If we just increased the minimum deposit for mortgages then it is true that applying it across the board for all mortgage types (as was done pre 80s when people needed a sizeable deposit such as 20%) then it would make it harder for first home buyers to purchase right now. Harder in that it would take longer for them to save the minimum required deposit.
The LTV ratio does not have to be a blunt instrument, it can be raised for a segment of the market, such as investors who are purchasing existing residential housing and exclude home owners upgrading or downgrading as well as excluding first home buyers. If the LTV changes were made purely for investors buying existing dwellings, the distributional/political concerns raised above in the AFR would be irrelevant. Plus the residential construction industry should favour such a change because there would be a higher chance an investor may actually build a house/apartment and rent it out instead of buying existing dwellings.
Next we have the sentence above, “Australia’s 1980s reform agenda began with the recognition that credit controls and the like ended up distorting the efficiency of the system”. Without any evidence (which cannot really be expected in a short editorial) we need to question this statement. If there were inefficiencies, were they primarily due to credit controls or were there many factors contributing to the inefficiencies?
In a speech by RBA Deputy Governer Mr Battellino on 16 July 2007 he said,
Listing them all [the regulation controls on the financial system] could easily fill up the whole time allocated to me, so let me cut them down to their essential elements.
He then mentions that interest rates on both loans and deposits are controlled, reserve and liquidity ratios are in place, loan size and industry are controlled, banks were specialised, foreign exchange transactions are controlled and the exchange rate is controlled.
That is a hell of a lot of control, with LTV playing what appears to be quite a minor part.
Now, for a while I have had an item on the banking policy page to-do list which is:
-Raise the minimum cash deposit back up to 20%
Because of the article above in the AFR yesterday I am now changing that draft policy idea to be more specific, so it now reads:
-Raise the minimum cash deposit back up to 20% for investors purchasing residential properties that have already been built
I have also added the following line:
Stagger the phase in of higher deposit ratios and the removal of demand side incentives such as negative gearing etc so that house prices do not rise any faster than 3% per year while attempting to make the changes slowly enough to avoid house price deflation
Lastly, as an interesting aside, there was a piece recently in The Australian newspaper, 3 August 2013, on the percentage of first home buyers in the market titled ” Price rises freeze out first-home buyers“
The percentage of first-home buyer mortgages in Queensland had more than halved between 2011 and this year from 20.1 to 9.8 per cent, while the figures for NSW had also dropped from 14.2 to 7.3 per cent. In South Australia, where first-time owners can claim $15,000 for new homes and $5000 for established homes, their proportion of the home-loan market rose from 15.5 to 18 per cent.