Australia low interest rates fuelling intergenerational inequality

The Reserve Bank of Australia may not move in lock step with its global peers to rein in cheap money, despite acknowledging booming house prices fuelled by record low-interest rates were hurting first home buyers.

RBA assistant governor Luci Ellis said intergenerational inequality was a “legitimate concern” and home ownership was increasingly influenced by the bank of mum and dad and inheritance.

“People whose parents rented are going to be in a much more difficult situation to actually get into housing themselves,” Dr Ellis said.

But prices were more complicated than cheap debt, and the market was heavily influenced by supply issues, cash handouts, tax incentives, and, more recently, demand for larger homes.

“The combination of the time confined at home during lockdowns, and the likely future of more working from home has brought the quality and size of one’s home sharply into view,” she said.

Dwelling supply had outpaced migration for several years, Dr Ellis noted, which was supported by generous taxpayer subsidies, and vacancy rates across Sydney and Melbourne had risen while rents remained steady.

“This demand response during the pandemic relates to the quality and comfort of each individual home, and this is a very different margin of adjustment than the number of new homes.”

But while providing more and better access to the types of houses people wanted would dampen the rapid increase in prices seen over recent years, they would not reduce overall demand or prevent price spikes.

Appearing before a Parliamentary committee into house prices on Monday, Dr Ellis also indicated throwing money at the problem was not a solution, and criticised government grants programs.

“You don’t improve affordability by giving people even more money to then bid up prices,” she said. “Housing market policies that add to demand will only amplify any upswing in prices.”

Dr Ellis also said the tax treatment of investor property through negative gearing and capital gains exemptions meant it was “very attractive”; however, this had the benefit of keeping rents low compared to prices.

“Because of the tax advantages, individual households investing in rental property are willing to accept a relatively low yield; it’s still attractive relative to other investments.”

RBA governor Philip Lowe recently said tax and social security policy were a better way to deal with high house prices than lifting interest rates.

“While monetary policy is contributing to higher housing prices at the moment, the way to address these concerns is through the structural factors that influence the value of the land upon which our dwellings are built,” he said.

Despite having very little influence over interest rates, Prime Minister Scott Morrison on Monday promised to keep downward pressure on rates, tapping into public concern about cost of living.

Financial markets are pricing in rate rises as early as July 2022, well ahead of the RBA’s 2024 guidance; but Dr Ellis told the committee Australia was in a different situation to many other countries and would not necessarily move in lock-step with its central bank peers in tightening monetary policy.

“We’re not quite in the same situation in the US in terms of inflation pressures,” Dr Ellis said. “There’s no necessary linkage between what the Fed does, and there’s no requirement for us to move step by step with that.”

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