Low rates trump new supply to push up house prices, RBA says

204 views 2021-09-16 12:32:23

Australia’s fast-rising housing prices are a consequence of lower interest rates and people’s ability to spend more on homes, and not even the recent boost to supply from apartments and HomeBuilder-driven dwellings will change that, Reserve Bank officials said on Tuesday.

Increased supply of new dwellings, which some private sector economists say could even reach a net oversupply of 150,000 dwellings by 2023, would reduce the growth in prices but would not be enough to offset the greater spending power coming from low interest rates and easier lending standards, RBA assistant governor Luci Ellis said.

“You don’t increase affordability by giving people more money to spend on housing,” Dr Ellis told a parliamentary inquiry into housing affordability and supply.

“More expansive supply will help – but in the face of a large increase in demand, it will only help, it will not eliminate the increase in house prices.”

The central bank cut its benchmark lending rate to a record-low 0.1 per cent in November. Treasury officials told the hearing rates had come down from double-digit highs last seen in the 1990s and were unlikely to return to those levels, freeing up people to spend more cash on housing, and this was the problem policymakers were trying to tackle.

Efforts to boost housing affordability defied simple answers such as changes to zoning, Dr Ellis said.

The committee chairman, Liberal MP Jason Falinski, referred to an RBA report that said 68 per cent of the cost of an inner-city apartment was due to zoning laws.

Dr Ellis said the same report also showed that “essentially zero per cent” of the cost of an inner-city apartment in Brisbane was attributable to zoning laws.

“You’ve got to see the housing market holistically,” she said.

“There are aspects where restrictions on supply will mean the relative cost of certain types of housing will be higher than they otherwise would be. But thinking about the welfare of the whole Australian population and the housing needs of the whole Australian population, it is also the case that there are different types of housing and different restrictions will have different effects on different sub-markets.”

Prompted by Labor committee member Ged Kearney, Dr Ellis said the RBA maintained its view that negative gearing and capital gains tax discounts triggered property speculation.

“The bank has always held the view that the combination of negative gearing and concessional capital gains tax and, indeed, the way we tax older Australians – or don’t tax older Australians – combines to encourage essentially speculative investment in property,” she said.

There were both positives and negatives to that, Dr Ellis said.

“It probably means that at the margin, rents are lower for some households who rent, but it does add a speculative dynamic to the market that is something that we’re quite concerned about, given our financial stability mandate.”

But as with zoning, housing affordability did not boil down to those two tax instruments.

“It’s not just the negative gearing or just the capital gains tax,” she said.

“We believe the tax system is worthy of review, but not one feature in isolation. It requires a holistic review in order to get the right combination of parameters so that the treatment of income-producing assets in the tax system doesn’t have deleterious effects on other elements of the public interest.”

The changes needed to improve housing affordability depended on policymakers, not central bankers, Dr Ellis said in response to a question from Labor MP Julie Owens.

“I think there are a number of areas of policy for government, not for a central bank,” Dr Ellis said.

“That said, what we are fundamentally seeing here is a distributional issue. If housing prices are rising, it’s because someone can afford to pay those prices. But the issue is that not everybody can.”

This article is from Australian Financial Review, please click the following link for the original article: https://www.afr.com/property/residential/low-rates-trump-new-supply-to-push-up-house-prices-rba-says-20210913-p58rd6


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