Reserve Bank governor Glenn Stevens yesterday showed the sort of leadership that the Federal Government, especially treasurer Joe Hockey, has refused to exhibit on the Sydney house price boom.
He told a Brisbane lunch, in a question and answer session after a major speech, that he was concerned about the the Sydney property market, telling his audience that “I think some of what’s happening is crazy".
His comments on property overshadowed comments on the bank’s current monetary policy stance which made it clear another rate cut was possible.
In fact the economic picture he painted was at marked variance with the optimism of last week from the Federal Treasurer and Prime Minister in the wake of the budget and the March quarter national accounts.
The RBA clearly sees economic growth slowing this quarter because of weak trade volumes, lower household demand and weak wages.
The dollar spurted higher on the comments about Sydney house prices and monetary policy, topping 77 US cents, and then falling back.
Mr Stevens said he found the steep rises in property prices in Australia’s biggest city "acutely concerning for a host of reasons, many of which are not to do with monetary policy. “I think it’s a social problem,” he said
But for the central bank, monetary policy could not be dictated by the Sydney market alone.
"Sydney’s not the whole country. Prices in Brisbane are, I think, rising, but nothing like that pace,” he said. “There’s not much happening in Adelaide, in Perth they’re probably falling. Canberra, there’s not much happening and in regional centres across the country there’s not much happening.
“So when you’re devising that economic policy for the country, yes I’m very concerned about Sydney and I think some of what’s happening is crazy, but we’ve got a national focus as well and that just increases the complexity,” Mr Stevens said.
Coming six days after Federal Treasury head John Fraser described Sydney and parts of Melbourne being in a ‘bubble’ (something denied by the Abbott Government), Mr Stevens comments are the most direct the central bank has made on the price boom in Sydney in particular.
The central bank and Mr Stevens have already warned that the boom in Sydney and especially investor lending risks unbalancing the economy, which is the detriment of the whole country.
His comments come amid renewed debate about elevated house prices and the high costs of getting a foothold in the Sydney and, to a lesser degree, Melbourne property markets.
Mr Stevens also took the paddle to claims from the Federal Government that it was boosting infrastructure spending. He pointed out that there was an 8% slide in infrastructure spending last year (and economists say it would have been more had it not been for the upsurge in spending in NSW by the O’Farrell/Baird governments).
He told the Brisbane lunch that more infrastructure spending might go some way to addressing Australia’s sub-trend economic growth rates. And the Federal Government could step in with a more ambitious long-term national infrastructure program, financed and managed jointly by the public and private sectors. This, he said, would address slack business demand outside mining while enhancing productivity and lifting business and consumer confidence.
“The suppliers would feel it was worth their while to improve their offering if projects were not just one-offs. The financial sector would be attracted to the opportunities for financing and asset ownership.The real economy would benefit from the steady pipeline of construction work – as opposed to a boom and bust," Mr Stevens said.
And, after admitting that the central bank’s own growth forecasts two years ago had been optimistic, Mr Stevens warned the 0.9% rise in first quarter GDP (from the December quarter) was unlikely to be repeated this quarter.
"Some of the strength resulted from unusually high export shipments of resources, which were less disrupted by weather conditions in the cyclone season than has often been the case in the past," he said.
"Indications are that this pace of growth wasn’t repeated in the June quarter, when shipments of coal in particular were affected by weather disruptions on the east coast."
And Mr Stevens made it clear that of the three major groups in the economy – government, business and households, the latter had the least capacity to expand spending to help boost the economy.
"Much of the effect of monetary policy comes through the spending, borrowing and saving decisions of households," he told guests.
"There isn’t much cause from research, or from current data, to expect a direct impact on business investment.
"But of all the three broad sectors – households, government and corporations – it is households that probably have the least scope to expand their balance sheets to drive spending," he said.
"That’s because they already did that a decade or more ago. Their debt burden, while being well serviced and with low arrears rates, is already high."
