RBA Governor Macfarlane: Economic Myth Buster
RBA Governor Macfarlane’s appearances before the House Economics Committee see some woeful displays of economic ignorance and ham-fisted attempts at political point-scoring on the part of Committee members. Most of their questions consist of wildly partisan statements with which they then invite the Governor to agree, as if Macfarlane is not smart enough to see them coming. In what is invariably a very classy performance, Macfarlane and his senior officers patiently listen to these questions and elevate the proceedings by turning them into some much needed education for Committee members and the public.
Particularly interesting were Deputy Governor Stevens’ remarks on the results of the RBA’s current research into home equity withdrawal. Stevens said that the early results point to something this blog has been arguing for some time, that very little of this is going into consumption, but instead into other financial assets. As Stevens pointed out, if home equity withdrawal had all been going into consumption, we would have already seen a massive boom and bust in consumption and this is not remotely supported by the data. When this research is finally published, it will almost certainly make a lot of commentary on this subject look very silly.
Macfarlane noted that the boom and subsequent correction in Sydney house prices closely matched what was happening with population growth in NSW and suggested that the recent decline in house prices was attributable to net emigration from the state, which in turn is driven by housing affordability. In other words, there are some sound fundamental reasons for the observed behaviour of Sydney house prices, with feedback from house prices to population growth as falling housing affordability drives people out of the state. Macfarlane did lapse into using the term ‘bubble,’ but I think this was just a concession to popular usage that is belied by what he had to say on the subject.
Macfarlane also agued, consistent with the consenting adults view, that none of us can know what the ‘right’ net foreign debt to GDP or private debt ratios should be, and also noted that fiscal policy has not had a major impact on monetary policy in the last seven years.
Perhaps the funniest moment was when a Committee member tried to argue against the privatisation of Telstra, on the grounds that consumption would suffer as people bought newly issued Telstra stock. Deputy Governor Stevens suggested that the impact on consumption would be zero ‘as a first approximation.’ The member in question probably still does not realise how stupid this made him look.
The Hansard transcript of proceedings should eventually appear on the RBA web site, for those who are interested.
posted on 12 August 2005 by skirchner
in Economics
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Comments
An increased real demand for accomodation is not an adequate explanation Sydney’s real estate boom. Sydney’s population did not increase by 100% over the past decade. Even income growth per capita, although strong, had only been about 30% over this period.
If there were fundamental reasons behind the spike in Sydney realty then we would be seeing a correlated spike in rents as more value (earners and earning power) chases the same amount of land. But we are not seeing rent increase that much. Rents have basicly kept track with nominal income growth ie the CPI.
The constraints on land supply through zoning and municipal and environmental zoning have certainly worsened the Sydney land shortage. This has probably been the main cause for the intensity and durability of Sydney’s realty boom.
But the major cause of the realty boom is pecuniary not real: a massive increase in the demand for, and supply of, easy and cheap financial credit. This is shown by the massive run up in housing debt over this period.
Perhaps this reflects a fundamental change in the time and space preferences of well-resourced consumers - as a superannuation strategy or for long term secure access to good accommodation.
Or, more likely, its a bubble.
Posted by Jack Strocchi on 08/12 at 09:19 PM
“Macfarlane noted that the boom and subsequent correction in Sydney house prices closely matched what was happening with population growth in NSW and suggested that the recent decline in house prices was attributable to net emigration from the state, which in turn is driven by housing affordability. In other words, there are some sound fundamental reasons for the observed behaviour of Sydney house prices, with feedback from house prices to population growth as falling housing affordability drives people out of the state.”
Sure, there are sound fundamental reasons behind the recent declines, but where are the fundamentals behind the boom?
You have consistently argued that there is/was no housing bubble, and that current house prices are rational. However, Macfarlane seems to be arguing that unaffordable housing has created an exodous from Sydney to more affordable cities (particularly by young people). If this is the case, it surely means Sydney house prices moved beyond what the fundamentals would support and into ‘bubble’ territory?
As Jack Strocchi says, the real reason for the run up in prices is the “massive increase in the demand for, and supply of, easy and cheap financial credit”. This may indeed be a permanent shift (to low interest rates) and Sydney may becoming a city where only older wealthy people can afford to live. The economics may be rational but how does a city function without a mix of socio-economic groups?
Posted by .(JavaScript must be enabled to view this email address) on 08/15 at 11:09 AM