Reserve Bank To Limit Capital Growth of Property

This is in today's Age (10th Feb) http://www.theage.com.au/business/rates-to-fight-housing-booms-20100209-npqm.html

The Governor of the Reserve Bank has now explicitly stated that the bank will use interest rates to try and limit asset bubbles and busts such as property booms.

I'm not sure how much effect they will have but I kind of think that less volatility in teh property market is worse for us investors as we can't buy cheap and sell at the top.

Do you think things will be different and will you need new strategies to deal with it?

Here is the article:

RESERVE Bank governor Glenn Stevens has flagged that the Reserve could raise interest rates in future to stop rising house prices developing into a boom and bust that would damage the economy.

In a landmark speech in Sydney to a symposium celebrating the bank's 50th birthday, Mr Stevens embraced the idea of the bank ''leaning against the wind'' of soaring asset prices by using higher rates to bring buyers back to earth.

Until now, the Reserve's official line has been that it raises interest rates only to keep underlying inflation within its target zone of 2 to 3 per cent a year over the long term. From now on, it will raise rates to control inflation and/or prevent financial instability developing.

In a long discussion of the lessons of the global financial crisis, Mr Stevens argued that the bank could not stand by and let financial imbalances develop - as happened in the US housing boom, which then collapsed spectacularly, pitching the world economy into its worst recession for 75 years.

But he also forecast that if Western governments give priority to cutting back their budget deficits sharply - as the Rudd government has promised - this would inhibit growth, and therefore could mean ''a lengthy period of rather low short-term interest rates''.

The RBA last week raised its forecast of growth in 2010-11 to 3.5 per cent, putting pressure on the government to bring forward its planned austerity program to the May budget, rather than use the budget to deliver the traditional pre-election giveaways.

Treasurer Wayne Swan has pledged to limit the growth in real spending to 2 per cent a year once the economy returns to trend growth. With the population growing 2 per cent a year, that would mean no growth in real spending per head. Labor has assumed the pledge would not kick in before next year, but the faster-than-expected recovery could force its hand.

Mr Stevens announced the Reserve's broader vision of its role to an audience of many of the world's central bank chiefs and leading Australian economists.

In a paper co-written with senior bank researchers Adam Cagliarini and Christopher Kent, he delivered a veiled but sharp critique of the ''hands-off'' approach of former US Federal Reserve chairman Alan Greenspan. The paper argued that by taking no action to slow the unsustainable asset boom, central banks allowed a crisis to develop - followed by an economic slump.

''The issue is not bubbles, or even asset prices per se,'' Mr Stevens said. ''The issue is the potential for damaging financial instability when an economic expansion is accompanied by a cocktail of rising asset values, rising leverage and declining lending standards.

''There is a large distance on the spectrum between passively accepting asset and credit developments and aggressively seeking to reverse them. Even with the development of other tools, it is unlikely to be credible for central banks not to move, in the next decade, at least somewhat in the 'responsive' direction.''

Some observers believe the bank is already pursuing this policy unofficially, and its three consecutive rate rises late last year were aimed at slowing soaring growth in house prices as much as inflation generally.

The Bureau of Statistics reported last week that Melbourne house prices rose almost 20 per cent last year, on the back of rapid population growth, low interest rates, grants to first home buyers and a dramatic recovery in confidence.

At yesterday's symposium, Mr Stevens' new stance was endorsed by the president of the European Central Bank, Jean-Claude Trichet, and the head of the Bank of International Settlements, Jaime Caruana.


McBrain
www.spanishhomecooking.com.au
 
Heres what I think.

Whenever you hear something like this then you can be sure of one thing. The reserve bank thinks proprty prices will continue to rise and are huffing and puffing. Thats a good thing! Beyond that the article is meaningless.

As yourself - why do they come out and say it in the media - why dont they just do it. its because they use the media to keep a lid on it so they dont have to do it!

Ive been watching West Wing so I have this stuff all sorted!
 
I think you're right Aussierouge, just saying it does have the desired result, that's why they put out such carefully worded statements about interest rates.

Having said that I can't see many investors and homebuyers deciding not to buy property because Glenn Stevens has made a statement without action.

I think it will be difficult to control property prices with interest rates without adversly affecting other areas of the economy though, it might actually cause more volatility.

Cheers
McBrain
www.spanishhomecooking.com.au
 
G'day. No one has any idea what will happen. People can only see just past their noses. What they care about the most is that property prices dont jump another 20 percent over the next 6 months. The built up demand is amazing.
 
Whenever you hear something like this then you can be sure of one thing. The reserve bank thinks proprty prices will continue to rise and are huffing and puffing. Thats a good thing! Beyond that the article is meaningless.

I totally agree.

I remember a similar speech given by Peter Costello when he was Treasurer many years ago: "We want to stop the boom - bust cycle that occurs in real estate" were the words that stuck out to me. I remember laughing at time time and thinking - you may as well go down to the beach and try to hold back the tide with a stick.:rolleyes:

Cycles come and cycles go - that's why it is called a cycle. :rolleyes:
 
I agree that the RBA is just trying to tell the property market to take it easy.

The trouble for the RBA is they have one lever and it affects all sorts of other things.

Even if the RBA raises rates enough to slow house price increases, they will never raise them so far that it causes significant price falls. A bust is much more damaging than a boom, particularly in terms of who gets blamed.
 
Heres what I think.

Whenever you hear something like this then you can be sure of one thing. The reserve bank thinks proprty prices will continue to rise and are huffing and puffing. Thats a good thing! Beyond that the article is meaningless.

As yourself - why do they come out and say it in the media - why dont they just do it. its because they use the media to keep a lid on it so they dont have to do it!

you couldn't be any more right if you tried.

they've been using the media to feed D&G into the market to keep a lid on specufesting.
 
Rising interest rates only affect people who have not paid off their houses (as would generally be the case with LLs). However, there is a large percentage of the population who own their houses outright...it was above 50% last time I checked so rising interest rates will target people early in their home buying cycle and LLs, ....yet more discrimination against LLs and young families.
 
Rising interest rates only affect people who have not paid off their houses (as would generally be the case with LLs). However, there is a large percentage of the population who own their houses outright...it was above 50% last time I checked so rising interest rates will target people early in their home buying cycle and LLs, ....yet more discrimination against LLs and young families.

Obviously this varies by postcode, but I've always believed the rule of thumb is 1/3 own outright, 1/3 mortgaged, 1/3 renting.

As more and more retirees look to fixed interest/cash products in their retirement, higher interest rates will actually benefit them. (As an older guy at work continually likes to point out! :rolleyes:)
 
Rising interest rates only affect people who have not paid off their houses (as would generally be the case with LLs). However, there is a large percentage of the population who own their houses outright...it was above 50% last time I checked so rising interest rates will target people early in their home buying cycle and LLs, ....yet more discrimination against LLs and young families.

it affects EVERYONE because the cost of DEBT which fuels our society increases.

so the farmer isn't affected? the small business owner isn't affected? what about the GOVERNMENT who borrow their own bluddy money and use taxpayer funds to pay it off? do YOU not see the reduced effect of that?
 
Catch 22...

increase rates = control house prices = economic stalemate = low inflation

decrease rates = can't control house prices = economic/property boom = high inflation

The RBA can't win either way...
 
Once again here's how it works:

"financial stability" means the solvency of the 4 pillar banking system.
The reason rates have been low is to keep the banks solvent.
Once the banks have their A$$ covered rates will go up.

The RBA, through shills like Glenn Stevens, will come out with whatever excuse as a reason for doing whatever they want to do.

Rates have been kept low by the RBA, sooner or later they will come back up and higher than they should be.

The built up demand is amazing.
There is no demand for something nobody can afford.

....yet more discrimination against LLs and young families.
What about discrimination against those who had to work for every single dollar of their deposit and never got any free ride?
Got loans based on BS?

e reserve bank thinks proprty prices will continue to rise and are huffing and puffing. Thats a good thing! Beyond that the article is meaningless.
Yes it's a great thing when market interest rates go to 9-10% in the space of a couple years and all the LMIers get foreclosed. Those who have real wealth ie equity will be back in the drivers seat. It's just a matter of time.

The RBA can't win either way...
The RBA has always won! Can't see the streak ending any time our lifetime.
 
What about discrimination against those who had to work for every single dollar of their deposit and never got any free ride?
Got loans based on BS?

Don't get me started PB, ..... lol! ..... I totally agree with you.

I know it can be tough, but geez at least people today have access to FHOG and other State Govt incentives. Back when I was a lad .... Nothin, nada ....

Now before you lot come at me with ... "it's harder today than when you were young", let me share this.... In 2002, .... my wife and I had nothing, not even a property of our own.... We managed to get out of a retail business with very little ...... Today we have 10 IP's ... We still don't have a flat screen TV or many other must have items. We went without and saved cash deposits for the first 3 IP's.

We even had 3 properties in Perth in the mid 1980's when interest rates were up around the 17% level and remember there were no 100% loans from the banks back then, ... you had to save the full deposit.

Interest rates will rise and fall, .... the next generation will always say "it's harder for them" .... Complaining about it solves nothing. You put your head down and make the required sacrifice to succeed.

We are all in business and no matter how much we discuss them here the RBA and Banks will do as they please. We have to learn to work with them to create our wealth.

That's better ..... (step's off soapbox) .... :D

Martin
 
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