Reserve Bank Deputy Governor Guy Debelle (Image: AAP/Dean Lewins)

A new report from a group of academics correctly diagnoses that Australia’s obsession with housing and the pandemic housing boom has worsened inequality, increased the risk of instability and diminished productivity and growth.

The team, led by UNSW, University of Glasgow and University of South Australia researchers, wants a more coherent and higher-level housing policy that reflects its economic, as well as social, importance.

But one of their key recommendations badly misses the mark: that the government should “expand the formal accountabilities of the RBA [Reserve Bank] to include maintaining a more price-stable and well-functioning housing market”.

The RBA already has three functions in its legislation — currency stability, maintaining full employment, and “economic prosperity and welfare of the people of Australia”. It has also agreed with the government that it will pursue an inflation target of “between two and three percent, on average, over time”.

Adding a fourth goal relating to the prices of one particular class of asset would further complicate the bank’s responsibilities when there is already significant potential tension between primary goals like full employment — currently the bank’s core focus — and other targets like inflation.

It’s worth quoting at length what deputy governor Guy Debelle recently said about house prices and the RBA’s role:

The Bank recognises that rising housing prices heighten concerns in parts of the community. Housing price rises can have distributional consequences. That is certainly an issue that needs to be considered, and there are a number of tools that can be used to address the issue. But I do not think that monetary policy is one of the tools. Monetary policy is focussed on supporting the economic recovery and achieving its goals in terms of employment and inflation. It is important to remember that while housing prices may not rise as fast without the monetary stimulus, unemployment would definitely be materially higher without the monetary stimulus. Unemployment clearly has large and persistent distributional consequences.

As Debelle hints in that statement, housing isn’t the only distributional game in town — unemployment is a much more direct distributional factor, and yet housing and unemployment may well be in direct tension as policy goals if the RBA had to take house prices into account.

But his main point is key: there are a number of other tools to use to address housing, before you get to considering monetary policy. In fact, the bulk of our problems with housing — both in terms of affordability and in terms of equity — are fiscal in nature.

Taxpayers subsidise investors to enter the property market in competition with low-income and younger people looking to buy their first home. And governments treat some housing assets differently to others — we don’t impose a capital gains tax on the family home no matter how absurdly high it rises in value. And governments persistently try to address housing affordability problems by repeating the same mistake of throwing money at first home buyers which merely pushes prices up further.

The report is correct that housing is less a supply problem than a demand problem, and fiscal policy settings are set to constantly stimulate demand.

There are also regulatory tools that can much more finely target demand issues than monetary policy: regulations to curb excessive lending to investors (such as interest-only loans) or regulation to prevent self-managed super funds (SMSFs) investing in housing. Indeed, the Murray inquiry into the financial system recommended that SMSFs be barred from borrowing, a recommendation ignored by the Coalition.

The proposal also prompts the question — if the price of one asset class is important enough to warrant inclusion in the goals of monetary policy, what about other asset classes? No other class is as economically important as housing, true — but what about equities? Sharemarkets play a key role in the wealth of Australians, both short-term and long-term — why not include share prices in the RBA’s remit too, to reflect their importance for investors and workers via superannuation?

And what would monetary policy have been like in recent years if the RBA had been compelled to keep one eye on house prices? The long build-up of house prices between 2013 and 2018 would have forced the RBA to tighten monetary policy at a time when it was routinely undershooting inflation, wage stagnation was setting in and economic growth was subsiding below 2.5%. Interest rates were too high even then, as the RBA later acknowledged by lowering rates in 2019, but that would have been even worse with a quadruple monetary policy goal.

Putting house prices in the RBA’s basket would simply let politicians off the hook. They’re the ones who have inflated house prices and exacerbated inequality.