RBA intervened to avert housing slump

The Reserve Bank deliberately intervened in the political debate over the property boom to stop governments releasing more land.

The bank feared the release of land would cause traffic gridlock, environmental problems and potentially a US-style housing slump.

The move, detailed by a senior RBA official in documents obtained under Freedom of Information laws, is a rare example of how Australia’s independent central bank is prepared to act to protect its monetary policy decisions.

The RBA last week sided with the major banks on interest rates, agreeing that their decision to go higher than the cash rate was to be expected, contrary to the claims of the Gillard government and opposition, who have vowed to reform the sector.

The RBA, this time at one with the government, has also stridently rejected the claims of some economists and commentators that Australian house prices are overvalued and, in effect, in a bubble that could soon burst.

But the Reserve’s willingness to go against a political line is shown by a senior RBA official’s recount of its posturing on the debate over housing supply, as prices rose significantly in the early 2000s.

A year ago, Rismark International managing director Christopher Joye emailed RBA head of financial stability Luci Ellis, and head of economic analysis Anthony Richards, to welcome RBA governor Glenn Stevens’s public statements that supply-side problems were contributing to price rises. Having long argued that prices had been driven higher by a lack of greenfield sites and poor planning decisions, Mr Joye took some delight in the fact the RBA had “jump(ed) on the supply-side bandwagon” — after using a submission to a 2004 Productivity Commission inquiry to comprehensively reject the theory.

Ms Ellis, in a private email to Mr Richards and several colleagues, insisted there was no evidence the boom in the early part of the decade was caused by changes in supply-side conditions, more the price and availability of credit.

Even if Australia had lifted supply-side restrictions, she said, and “became Phoenix or Las Vegas”, there would still be significant price cycles. “The people pointing to supply-side factors really believed at the time that if only these supply restrictions didn’t exist, prices would not have risen quickly. This is just rubbish, and we said so . Had we not ‘killed’ this debate (not that we did), some rather worse public policy outcomes would have occurred including bad environmental and traffic congestion outcomes, and more importantly, a housing supply overhang when the credit boom went away.”

Ms Ellis, who, like Mr Stevens and Wayne Swan, has pointed to the more recent contribution of supply-side issues to higher prices, believes government restraint on housing supply helped avoid a US-style slump.

Mr Joye criticised Mr Stevens for his “unconditional” claim that local housing is very “expensive by international standards”. Ms Ellis agreed with Mr Joye that local housing stock differed from the rest of the world and comparisons were dangerous. Six months earlier, she warned the RBA against statements that supply was more of a problem than demand and “housing would be affordable if only those nasty supply restrictions were abolished”.