A cooling housing market where prices stabilise or even fall a little, was a key aspect of the RBA decision to leave interest rates relatively high since about 2013 when the rest of the industrialised world was implementing near zero interest rates.
Along with enhancing financial stability, a weakening in house price growth was an unspoken but obvious consequence from the regulators as they imposed a range of rules to scale back bank lending, especially to investors and more risky borrowers.
The cost to the rest of the economy of deflating the house price boom has been sub-trend economic growth, little or no progress in reducing unemployment, ongoing weakness in wages and depressed levels of business investment.
The RBA had made it abundantly clear that it is happy to see the economy pay this price for the sake of a weaker house prices and a marked slowing in credit growth.
Yet some policy advocates are looking at ways to rekindle demand for housing which would completely undermine the years of RBA policy. This is where the boost to first home owners grant and the proposed people’s banks are unhelpful.
As the RBA and other housing analysts have often noted, the best long run way to further improve housing affordability is to increase the supply of dwellings relative to changes in demand.
Translated, this means building more dwellings in areas that are well services by public transport, school, shops, employment opportunities and other basic amenities.
This means either increasing the population density in the big cities, which is reasonably easy to plan for, or undertaking a significant spend on infrastructure so that living away from the centre of the major cities is more desirable. If the government also wants to see an improvement in housing affordability, it could trim the immigration inflow which would work from scaling back underlying demand. It is easy to do – the stroke of a pen could see immigration levels lowered.
Many issues in economics and economic policy can be analysed and the problems addressed with relatively straightforward policy prescriptions.
For housing, it is adding to supply relative to a given level of demand.
Well intentioned policies, such as the first home owners grant and the home buyer friendly people’s bank, work the other way and make housing even more unaffordable. They also suffer from the economists nightmare of complexity and productivity destroying red tape, and even a cursory look at the economic effects make them counterproductive.
They push prices higher as would-be buyers go to housing auctions with access to more money either with the grant or extra credit.
While these misguided policies are in place or threatened to be imposed, it will be harder for housing prices to adjust so that affordability is further improved, especially for would be first home buyers.