Today the RPData series showed house prices rising 0.4 per cent in the first half of April after a record monthly rise of 2.3 per cent in March. Double-digit annual house price gains are now the norm and there are growing risks that any further inflation in house prices will threaten the stability of markets and with that, the economy.
Today also, the RBA published the minutes from the April Board meeting and made just one reference to house prices. It was a corn-ball factual comment that “Housing market conditions remained strong, with housing prices rising in March to be 10½ per cent higher over the year on a nationwide basis”.
There was no discussion of whether this growth in house prices was a concern, or normal or whether, in the RBA’s view, it posed a threat to financial stability.
It is hard to know why the rapidly inflating $5 trillion in housing assets received no attention.
In contrast to the benign neglect of house price, the RBA noted on at least seven occasions, issues to do with the Australian dollar exchange rate.
The RBA noted “While the decline in the exchange rate from its highs a year earlier would assist in achieving balanced growth in the economy, this would be less so than previously expected given the rise in the exchange rate over the past few months”. Other references touched on some analysis and comment on currency moves.
This is most odd, given the rise in the Australian dollar is not having any meaningful impact on macroeconomic conditions. Indeed, economic growth is strengthening with the dollar at current levels and exports are growing very rapidly. This must sits at odds with RBA concerns over the “high” dollar.
In terms of housing, which is a much greater issue and potential problem for the Australian economy, such a head-in-the-sand approach from the RBA is very disconcerting.
As has been noted the RBA does not directly target house prices with monetary policy, but it is acutely aware of what damage unchecked asset price booms and busts can have on an economy.
It seems the RBA has, as it sometimes does, turned its focus to one issue which it judges to be a problem and in doing so, is missing the much bigger problem that is building by the day. These errors of judgment have, thankfully, not been too costly and the RBA has scrambled to save the day with catch up rate hikes or cuts.
When the penny drops at the RBA, its focus will obviously change and then it will embark on a monetary policy tightening cycle. It should have hiked interest rates already but with its over-egging of the Aussie dollar ‘over-valuation’, it has so far missed the boat. My guess is in the next six to 12 months, the RBA will have a lot of catch up to do.