RBA rate cuts a 'blunt tool', says industry analyst

"Why is the RBA doing the Federal Government's job?" asks Residex founder, John Edwards



Potential home loan interest rate reductions could spell disaster for some states’ housing markets, while simultaneously providing a much-needed hand to others, says Residex consultant and founder, John Edwards – and it’s not the RBA’s job to come to the rescue.

“As housing markets grow in strength, I am again drawn to the issues and problems associated with the Reserve Bank’s single tool of economic management – the setting of the cash rate.

Edwards tells Australian Broker he believes the RBA are ‘stuck between a rock and a hard place’ when it comes to dealing with the nuances of various regional housing dilemmas.

“They don’t have the right tools to manage the outcome. Some states definitely need to have the outcome managed and don’t need an interest rate reduction – and others definitely do.”

It’s up to the Federal Government, he says, to come in and do something.

“A state government can’t do anything quickly enough because it’s all about land supply and creating an incentive for people to do something and [state governments] potentially would just make things worse if they did that, because it would bring forward growth and create over-supply. I mean, basically the Federal Government had a need – and still has a need – to do something to stimulate the industry so that there is no need to actually reduce interest rates.

Edwards completed an analysis on the economic circumstances and future of the housing markets for all states and territories in Australia as at the end of March, 2013, revealing three groups of performers:

  • Weak
  • In need
  • No need

He says the two ‘particularly weak’ states economically are Tasmania and South Australia.

“Both have struggling housing markets and basically anything that would help lift their economic activity would be a blessing.”

The second category or, ‘in need’ group of states includes Victoria, New South Wales and Queensland.

“While these are all improving, they would benefit from some stimulus via an interest rate reduction. Victoria is in the poorest position, followed by New South Wales and then Queensland. Victoria has a dwelling oversupply problem and needs new industry to rejuvenate its economy. Interest rate reductions are not going have a great impact on this market because even with additional reductions affordability will not be solved.”

Edwards says NSW also has affordability issues, but doesn’t suffer from the same housing supply issues as Victoria.  He says interest rate reductions would help the region, even though it is the most un-affordable market in Australia.

“Following the natural disasters over the past couple of years, Queensland is finally regaining ground. Of the three ‘in need’ group of states it would move forward stronger than the others if a rate reduction came to pass. Queensland has the most affordable housing market of the group and given its resource base, it has the capacity to grow more strongly. In fact, there could be risks that parts of the state could boom and cause a housing bubble if there were significant interest rate reductions.”

The third and final group of performers are the ‘no need’ states of WA and the Northern Territory, neither of which have any need for further interest rate cuts, according to Edwards.

“In fact, it is arguable that their current growth is too strong. These two areas could quickly become places where interest rate reductions cause significant problems and price bubbles. There is a clear shortage of stock in WA and a build-up of population numbers at the same time. It appears that problems in other states and constant positive news about job prospects here may be causing people to move to Perth. The increase in population at a time when there are housing shortages and a gradual increase in unemployment as the resource boom comes to a close could pose problems on its own. Should interest rates also be decreased and house prices bid up quickly, there could be a serious issue in the medium term.”

All of the above, he argues, makes it exceptionally hard to decide what the RBA should do with interest rates.

“I have often pondered what the alternative is to the blunt tool that the RBA has. In essence, I believe it should be retained; however, just as the government has set a range for inflation to be maintained I suggest a range in which the RBA is charged to keep our currency trading within should also be set. This is not a new idea as the RBA does enter the market on occasions to keep the currency at what it believes is an acceptable level.”

“Basically, the Reserve Bank is being asked to do the federal government’s job.”

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