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Rate cuts without fiscal policy support ends in house price tears

The RBA has made clear it wants the economy to grow faster, to employ more people in a bid to drive up wage growth and, in turn, inflation. It’s only got one way to make that happen. By cutting rates.


But there is another policy lever, the one operated by governments. Fiscal policy can be targeted at particular sectors, at particular individuals, unlike monetary policy which the RBA admits is a blunt instrument.

Yet fiscal policy sits in the garage with no fuel in the tank and no one prepared to get behind the wheel.

The logical conclusion of extreme monetary policy intervention and the refusal to engage in fiscal policy is now playing out at the Saturday auctions in the suburbs of Sydney and Melbourne.

HSBC economist Paul Bloxham this week noted the number of occasions the RBA has referenced fiscal policy is about seven times what it was at its most recent low point in late 2011. This “fiscal jawboning” is effectively off the charts, with Bloxham saying “fiscal policy makes more sense than pushing monetary policy to its limits”.

At 0.75 per cent, monetary policy may not be at its limits but it is close enough to read the danger sign hanging from the guard rail. That’s why the RBA keeps banging on about fiscal policy.

In the mid-1990s, almost 44 per cent of people in NSW owned their home outright. Now fewer than 30 per cent do, with big increases in the proportion of people renting or holding a mortgage. It’s a similar story in Victoria, with both the number of people heading into retirement while owing money to banks and those sitting in the rental market on the rise.

That’s translated into the second most indebted households in the world and a generational crisis that will plague this country for years.

The bank can only hope this recent surge in prices runs out of steam. Otherwise, we will be back where we were just two years ago, talking about the housing affordability crisis playing out across the country.

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