How rising house prices can help the economy

Rising house prices may unsettle homebuyers, but the Reserve Bank’s latest research shows they actually stimulate growth, boosting GDP, spending, investment and employment over the medium term. Stephen Koukoulas reports.

ECONOMIC and policy debates continue to be dominated by house prices, housing affordability, interest rates, housing construction, housing supply and demand, while the Reserve Bank of Australia (RBA) was released research This shows how rising house prices help the economy, at least in the medium term.

RBA for November Monetary Policy Statement It included an update on some of the Bank’s previous research showing how the wealth impact on households resulting from higher house prices affects the economy. In simple terms, the RBA found that rising house prices increase consumption, business investment, public demand and residential investment, resulting in a moderate, generally positive spillover to other parts of the economy.

(Source: RBA)

As a result of the research, it was revealed that for a 10 percent increase in housing prices, the GDP level increased by 0.7 percent according to the central estimate.

It found that the increase in GDP growth was reflected in higher inflation, adding about 0.25 percentage points to reduced average inflation over the medium term.

This should come as no surprise, given the bulk of Australia’s wealth in absolute terms and relative to almost all other countries. other countriesIt is linked to increases in wealth, including retirement savings and housing.

It is important to note and emphasize that the RBA does not directly target house prices with its interest rate settings. It never was and never will be.

However, there is a deep interest in housing from various perspectives.

As mentioned above, it looks at the pressures and risks on economic growth and inflation arising from material fluctuations in house prices, both upward and downward. Note that according to the RBA’s modelling, sharp falls in house prices weaken wealth, household spending, lower inflation and, as a result, lower interest rates. This is the adverse effect of rising house prices.

Financial stability is important

RBA has a intense interest from house price cycles to financial stability, prudence of banks and financial institutions in mortgage lending, and financial management of the household sector in relation to mortgages.

If banks and financial institutions are too lax (or strict) on lending, the RBA will consider the macroeconomic effects of such policies and act with other regulators to remediate any risks to stability that risk escalating from the financial sector.

For example, financial instability resulting from questionable compliance with lending standards will cause the RBA to keep monetary policy tighter as a counterpoint. It will do so until these problems are corrected by financial institutions and regulators.

RBA Governor in final press conference following ‘pending’ interest rate decision Michele Bullock Questions were asked about the so-called credit quality of the mortgage market and the financial health of the household sector.

Bullock noted He said there was no material sign of a significant imbalance in current readings. Banks were well capitalized, credit flowed to creditworthy borrowers, provisions for bad debts were low, and financial systems were functioning well. The household sector was in a strong financial position.

In other words, the sound functioning of the financial system and the sound balance sheet position of the household sector were not an important issue for the RBA and interest rate setting.

This is good news.

The continued stability and security of the financial system largely helps explain the boom in the financial health of the banking sector, including the surprisingly strong rise in stock prices in recent years.

Long-term effects of rising house prices

It should be noted that footnotes The RBA’s research into the effects of rising house prices found the following:

‘According to this scenario [of rising house prices]The path of the cash rate should shift upward relative to the baseline. Under this scenario, the increase in demand for housing assets will disappear (possibly beyond the forecast period), so the impact on the level of GDP, real house prices and inflation will be only temporary.’

In other words, the very long-term effect is generally neutral, as higher growth and higher inflation lead to higher interest rates; This serves to slow down the economy with the usual delays.

All of this shows that house prices are changing as part of the oscillatory element in the business cycle. Rising house prices are good for the economy, including employment, in the short and medium term. In other words, when the economy is relatively weak, as it is now, a period of rising house prices can help support economic activity, albeit with some upward inflation.

There are numerous other economic issues related to housing; construction costs, availability of suitably skilled labor, competition or substitution with the non-residential construction sector, to name a few.

Suffice it to say that housing is a dominant issue for the Australian economy and will have an impact on policy settings, whether indirectly or not fully acknowledged.

Stephen Koukoulas is one of Australia’s most respected economists, the former chief economist of Citibank and senior economic advisor to the Australian Prime Minister. You can follow Stephen on Twitter/X @TheKouk.

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