The heated housing market is preventing the Reserve Bank from making further cuts to interest rates, which are needed to push the exchange rate down.
Leading economist, Ross Garnaut says the Australian economy is facing “very difficult circumstances” and a lower exchange rate is needed to prevent our economy weakening further, Fairfax reported
"There may be excessive price inflation in housing, and if that is the case it is very important that we deal with that problem with specific measures rather than running our whole monetary policy to suit the housing sector." Fairfax quoted Garnaut.
Garnaut said changing the capital adequacy rules that bias housing lending will go some way to help cool the property market without raising rates.
"It is ludicrous to be worried about lending risks in the housing sector on the one hand while at the same time requiring banks to put more capital aside when they are lending to BHP," he told Fairfax.
"And there are several reasons to do something about negative gearing. There are budget reasons, and reasons to do with keeping within reach the old Australian dream of widespread home ownership. It would also contribute to putting a lid on the housing bubble so we could reduce interest rates and the exchange rate as required by the rest of the Australian economy. But the problems can't be solved by the Reserve Bank alone. It requires co-ordination of prudential regulation, monetary policy and fiscal policy."
In a speech to the Committee for Economic Development of Australia (CEDA) in Adelaide last week, the Reserve Bank governor, Glenn Stevens
expressed his concern that the low-rate environment might be at risk of creating a housing bubble. He also called upon the government to step up and design policies to help the Central Bank’s monetary setting.