The RBA’s cut to interest rates will boost house prices, but that’s not the only effect

With the Reserve Bank of Australia cutting official rates to 0.75 per cent on Tuesday, has been a wave of commentary about the move doing little to help the economy apart from boosting housing prices.

There are two parts to assessing this claim. First, do rate cuts drive up property prices? Second, is that all they do?

Do rate cuts drive up property prices?

Economists have a precise answer to this question, and also a more practical one.

The precise answer is that all assets — stocks, bonds, property, stamps, vintage baseball cards, you name it — can be priced using what is known as the stochastic discount factor (SDF).

This says that in pricing an asset you should factor in all the future cash flows the asset will generate (rent or dividends or capital gains) and then translate those returns into today’s money, adjusting for the riskiness of those cash flows.

An easier way to think about how rate cuts might affect property prices — consistent with the asset-pricing approach — goes like this.

People look at how much money they can borrow based on what they can afford to pay back. An interest rate cut boosts their borrowing power.

Even though the major banks have only passed on about half of the Reserve Bank’s latest cut (owner-occupied mortgage rates have been cut by 13-15 basis points), that’s enough to give a household with income of $150,000 about another $12,000 to $14,000 in borrowing power.

They thus spend more and, because there is a limited supply of properties, this pushes prices up. So, yes, lower interest rates do tend to boost property prices.

Is that all rate cuts do?

But boosting property prices is not all that rate cuts do.

Higher prices for new dwellings help developers. They often lead to an increase in construction jobs as developers anticipate better conditions for selling properties.

New property construction has a number of other effects, too, such as changing the average quality of the rental stock and spurring more retail spending (because those new homes need to be furnished).

Perhaps even more important is the pseudo-psychological effect of existing home owners feeling wealthier when house prices go up. This can lead to increased consumer spending — and this can have a big economic effect, given consumer spending accounts for about 60 per cent of GDP.

This “wealth effect”, rational or not, seems to be real. It is part of the reason the Reserve Bank’s governor, Philip Lowe, appeared to be concerned about Sydney and Melbourne house prices falling in the past couple of years. It is also why federal treasurer Josh Frydenberg is happy to see property prices again on the rise.

Finally, lower interest rates do make business investment cheaper.

Would corporate tax cuts provide a bigger boost to investment? You bet. Are there diminishing returns to rate cuts as the cash rate approaches zero? That’s very likely to be the case.

But would businesses invest more if rates were two percentage points higher? No way. And would business like rates to be higher? I seriously doubt it.

Rate cuts do something to drive down unemployment, drive up consumer prices, and boost investment generally.

Are rate-cut driven prices increases bad?

But they certainly do also drive up residential property prices.

The important question is whether that’s bad or not. The answer to this question is a little murkier.

Let’s start with the fact borrowers should be thinking about how much to borrow.

If they borrow too much and are unable to repay their loans, that’s very bad news for them. Defaulting on a mortgage is a wrenching experience. Most people try hard to avoid that.

That said, sometimes people make poor choices through lack of information, lack of thought or lack of willpower. Occasionally an unscrupulous third party will encourage them to borrow more than they should.

But it’s not in the interest of banks to make too many loans that don’t get repaid. If borrowers are the first line of defence again bad price increases, lenders are the second line of defence.

There is a third line of defence: prudential regulation. The Australian Prudential Regulation Authority and the Australian Securities and Investments Commission are charged with enforcing “responsible lending laws” and ensuring the animal spirits and (sometimes) bad incentives of borrowers and lenders don’t get out of control.

So property prices increasing a few percent on the back of the rate cuts is unlikely to be problem — though as the Reserve Bank governor is fond of saying, “time will tell”.

Richard Holden is professor of economics at the University of NSW. This article first appeared on The Conversation.

Ref: Richard Holden (on 04 Oct 2019). The RBA’s cut to interest rates will boost house prices, but that’s not the only effect. Retrieved from https://www.abc.net.au/news/2019-10-04/house-prices-will-rise-with-lower-interest-rates/11573638

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澳洲联储降息将提高房价,但这不是唯一的影响

随着澳大利亚储备银行周二(2019年10月1日)将官方利率下调至0.75%,对这一举措的评论浪潮一浪高过一浪,除了提高房价之外,该举措对经济没有任何帮助。

评论包括两个方面。首先,降息是否会推高房地产价格?第二,房产价格是降息唯一能影响到的吗?

降息会推高房地产价格吗?

经济学家对此有一个精确的答案,同时也是一个更实际的问题。
确切的答案是,所有资产(股票,债券,房地产,邮票,老式棒球卡,随便您说)都可以使用所谓的“随机折现因子”(stochastic discount factor,简称SDF)进行定价。

这就是说,在对资产进行定价时,您应该考虑该资产将产生的所有未来现金流量(租金,股利或资本收益),然后将这些收益转换为今天的货币,并根据这些现金流量的风险进行调整。

一个更简单的方法来考虑降息对房地产价格的影响, 就像资产定价方法一样。
人们会根据自己有能力偿还的钱来考虑可以借多少钱。降息可以提高他们的借贷能力。

即使主要银行只通过了最近一次储备银行降息的一半左右(置业者的抵押贷款利率已降低13-15个基点),这仍足以使收入为15万元的家庭获得约12,000元至14,000元的借贷能力。

这样他们可以支配更多的钱,并且由于房源供应有限,这推高了房产价格。因此,是的,较低的利率确实会推高房地产价格。

房产价格是降息唯一能影响到的吗?

但是,提高房价并不是降息的全部。

新住宅的较高价格对开发商有帮助。由于开发商预期出售物业的条件会更好,因此它们通常会导致建筑工作增加。

新房产的建设也有许多其他影响,例如改变租赁存量和刺激更多的产业(因为这些新房屋需要装修)。

也许更重要的是,当房价上涨时,现有房主感到更富有的伪心理效应。考虑到消费者支出约占GDP的60%,这可能会导致消费者支出增加,并且可能产生巨大的经济影响。

这种“财富效应”,无论是否合理,但似乎是真实的。这视乎是储备银行行长菲利普•洛(Philip Lowe)对于悉尼和墨尔本房价在过去几年中下跌表示担心的原因。这也是为什么联邦财务主管乔什•弗莱登伯格(Josh Frydenberg)很高兴看到房价再次上涨。

最后,较低的利率确实会使商业投资更容易。

公司减税会为投资带来更大的推动力吗?很难说。当现金利率接近零时,降息收益是否会减少?很有可能是这种情况。

但是,如果利率提高两个百分点,企业会投资更多吗?不可能。企业是否希望费率更高?我对此表示严重怀疑。

降息可以降低失业率,提高消费价格并总体上增加投资。

降息驱动的价格上涨是否不利?

但是,它们的确也确实推动了住宅价格的上涨。

问题是这样是好还是不好。这个问题的答案有些模糊。

让我们从一个事实开始,借款人应该考虑要借款多少。

如果他们借了太多钱而又无法偿还贷款,那对他们来说是个坏消息。抵押贷款违约是一种痛苦的经历。大多数人都应该尽力避免这种情况。

也就是说,有时人们会因缺乏信息,缺乏思想或缺乏意志力而做出错误的选择。有时,不道德的第三方会鼓励他们借入过多的钱。

但是,过多的无法偿还的贷款不符合银行的利益。对于房屋贷款的不良上涨,如果借款人是第一道防线,那么放贷者就是第二道防线。

第三道防线是审慎监管。澳大利亚审慎监管局和澳大利亚证券与投资委员会负责执行“负责任的借贷法律”,确保借款人和贷方的冲动和(有时)不良激励措施不会失控。

因此,尽管降息后储备银行行长喜欢说,“时间会证明一切”,但降息后的房地产价格上涨将不是问题。

理查德•霍尔顿(Richard Holden)是新南威尔士大学的经济学教授。本文首次发表在《对话》(The Conversation)上。

Ref: Richard Holden (on 04 Oct 2019). The RBA’s cut to interest rates will boost house prices, but that’s not the only effect. Retrieved from https://www.abc.net.au/news/2019-10-04/house-prices-will-rise-with-lower-interest-rates/11573638

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