A diplomatic approach by the Reserve Bank to housing and the Australian dollar belies the urgency of Australia’s economic predicament. The RBA should stop hedging its bets and start saying something worth hearing.
The Australian economy faces a number of stiff headwinds. Some the RBA has little say over -- they cannot, for example, affect the size or timing of the collapse in mining investment. But there are other challenges that they have some say over. Two important ones are the outlook for the housing sector and the Australian dollar.
By taking a conservative approach and failing to communicate effectively, the RBA has put the Australian economy at risk.
The housing market, for example, presents a considerable financial risk. Our property sector is worth around $5.3 trillion and accounts for a majority of net wealth for most households. Our major banks are among the most leveraged financial institutions in the world -- mostly reflecting domestic mortgages.
Given its size and the leverage involved, the housing market will always present a systemic risk. It’s silly to suggest otherwise. When a small price fall can cut household wealth by hundreds of billions of dollars, it’s fair to conclude that we are dealing with a systemic issue. Put another way a sharp fall in prices would be devastating to households, the financial system and the broader economy.
Recently the RBA has made some firm statements on the property market -- particularly in its Financial Stability Review -- indicating that macroprudential policies may soon be implemented (Regulators are finally bringing balance back to the housing market, September 24). But the statements are not yet viewed as credible and the response has been slow compared with other central banks.
Our inadequacies can be best viewed in comparison to our cousins across the Tasman.
The Reserve Bank of New Zealand introduced macroprudential policies in October last year in response to housing conditions that were similar to those in Australia (A housing policy lesson from New Zealand, February 19).
Did it really take the RBA an extra year to come to the same conclusion as the RBNZ?
A year is a lifetime in financial markets and by taking a conservative -- and arguably complacent -- approach the RBA has not only failed to scare investors but let the property sector take monetary policy hostage, to the point where, until recently, most market economists expected rates to rise next year.
What about the Australian dollar? It’s a central piece of the rebalancing puzzle but if you read RBA reports you’d be forgiven for believing that it really isn’t a big deal. You’d never know, for example, that the dollar has to decline significantly for Australia to avoid its first recession in 23 years.
The RBA should be giving entire speeches on the Australia dollar, why it’s overvalued and the implications for the broader economy. Instead, they regularly provide a line or two in their major reports, often identical to those made a month earlier.
Again, we can compare the RBA with the RBNZ. Last month RBNZ’s Graeme Wheeler noted that the dollar “remains unjustified and unsustainable and continues to constrain growth in the tradables sector. We expect a significant depreciation.”
By comparison, the RBA minutes released yesterday noted that “the Australian dollar remained above most estimates of its fundamental value.” The Australian dollar rose in response to the minutes.
Every day the Australian dollar remains elevated it undermines the rebalancing process -- a fact that has been poorly communicated by the RBA. I expect the dollar to fall significantly over the next couple of years but if left too late it may not have time to offset the drag originating from mining investment.
The RBA is now faced with a choice. They can either cross their fingers and hope that their economic outlook is accurate or actively take steps towards achieving it.
In my opinion, they should take a page out of the RBNZ’s book and make their intentions perfectly clear: the dollar must decline, its level is unjustified and if it doesn’t fall, a recession could very well be on the way. Let’s see forex traders try to spin that positively.