Imagine if Australian house prices weren’t a problem.
Imagine if the average Australian wage kept up with the annual increase in house prices.
Below is an exchange with the RBA on that very topic. You can view the full exchange and the original letters here.
Dr Philip Lowe
Reserve Bank of Australia
GPO Box 3947
Sydney NSW 2001
Dear Dr Lowe,
I am not satisfied with your response of 14 July 2017.
From your last letter,
“As noted in my previous letter, the Reserve Bank does not target the level of asset prices, although housing price are taken into account in the Bank’s policy deliberations.”
For Anthony Dickman’s benefit, I have included a copy of the first few pages of your 2002 paper with the Bank for International Settlements, no 114, titled, ‘Asset prices, financial and monetary stability: exploring the nexus’.
Quoting from the abstract,
“The paper also argues that while low and stable inflation promotes financial stability, it also increases the likelihood that excess demand pressures show up first in credit aggregates and asset prices, rather than in goods and services prices. Accordingly, in some situations, a monetary response to credit and asset markets may be appropriate to preserve both financial and monetary stability.”
While the above may appear to be a convenient quote for the purposes of this discussion, my purpose in mentioning it is simply that whether the RBA should target or not target asset prices in general or asset prices in particular (such as Overnight Indexed Swaps or ASX 30 Day Interbank Cash Rate Futures), it depends on the reasons.
In your letter of 28 February you stated,
“The Board’s duties in setting monetary policy relate to the welfare of the people of Australia as a whole. It would not be consistent with that duty to set policy in a manner that favours people living in a particular city, or those who already own property or who do not but would like to do so.”
I believe the RBA’s current monetary policy settings result in the RBA board being vulnerable to a challenge by a suitably informed Treasurer, because the current settings excessively favour those Australians who already own multiple residential properties at the expense of those Australians who have not purchased property yet, but would like to do so and that the source of the problem is the weightings of the CPI index published by the ABS that your board bases its decisions on.
Just as when a Bank advertises an interest rate for a loan product, consumers need to assess the comparison rate, which includes all the extra fees and charges they will need to pay in order to accurately compare one loan product to another, there needs to be a comparison CPI which contains additional information compared with the standard CPI if the RBA board’s regular decisions on the cash rate are going to stop favouring the owners of multiple residential properties.
I am not talking about verifying calculations made by the ABS, as stated in your letter of 14 July 2017.
Let’s take a look at how your current decision making process penalises those Australian workers who have not yet purchased a home, but would like to do so, with an example. Let’s return to Bernie from my letter of 7 January 2017 who is earning exactly the average wage and is saving for a deposit to buy his first home, but let’s say he lives somewhere in Australia, so as not to favour a particular city.
Let’s now apply the following question, used by the ABS (1), to Bernie’s attempt to save for his first home,
“by how much would after tax money incomes need to change to allow households to purchase the same quantity of consumer goods and services that they purchased in an earlier period?”
As presuming an Australian worker on the average wage should be able to purchase an average priced home may be unreasonable, we will apply the above question in the following way,
By how much would after tax money incomes need to change to allow workers on the average wage to continue saving for a 20% deposit for an average priced house at the same rate as an earlier period?
In order to answer question one, we will assume Bernie is allocating a maximum of 30% of his net weekly wage to housing, by living as cheaply as he can in a shared house and saving the difference, so that 70% of his net wage is always being spent on goods and services in the economy.
If average house prices rose by $10,000 in a given year, a 20% deposit for that extra $10,000 would be $2,000. So if Bernie’s wage rose so that the increase in the 30% component of his net wage covered the additional $2,000 needed for a deposit, he would be saving at the same rate relative to the increase in house prices.
Let’s start by looking at what the actual change in the 30% component of the net average wage has been and use the average weekly earnings of all employees instead of average full time earnings, so as not to penalise those workers influenced by the trend of casualization.
* Based on 2017-18 tax and medicare rates
From table one, we can see that if the average priced house across Australia had risen by $754 in 2007, $1,584 in 2008….and $919 in 2016, workers on the average wage who had not yet purchased a home would have been able to save at the same rate each year for their 20% deposit, despite there being a rise in house prices every year.
Now we need to know what the actual change in average house prices across Australia has been from 2006 to 2016:
From table one and two above we can now calculate the answer to question one which is:
From 2007 to 2016, wage growth would have to have been an average of 239% each year for workers to keep up with average annual increases in house prices across Australia.
Are house prices rising too quickly or are wages growing too slowly?
While it may be tempting to think that wages are growing too slowly and we should therefore attempt to talk them up (4), because changes to the cash rate have an immediate and direct effect on the maximum borrowing capacity for Australians in the market to buy residential property, monetary policy would be more effective if directed toward reducing the rate of growth of house prices compared with the alternative of trying to increase the rate of growth in wages.
If you disagree with anything I have said in this letter or any of my previous letters, I look forward to hearing why.
1 Australian Bureau of Statistics 6467.0 – Selected Living Cost Indexes, Australia, Mar 2017, “What role does housing play in the consumer price index and selected living cost indexes?”
2 Australian Bureau of Statistics 6302.0 – Average Weekly Earnings, Australia, Nov 2006 to Nov 2016
3 Australian Bureau of Statistics 6416.0 – House Price Indexes: Eight Capital Cities, Dec 2006 to Dec 2016
4 ABC News 29 June 2017, “Reserve Bank boss Philip Lowe urges workers to push for pay rises”