(SYDNEY) Policymakers daunted by the idea of puncturing asset bubbles in coming years can learn from Australia's central bank, one of the very few to have deflated a housing boom without turning it into a crash.
As the world cleans up after the US housing debacle, central bankers are already fretting over how to tackle the next bubble, which may not be too far off as super-easy monetary policies worldwide leave financial markets flush with cash.
Up until a year ago, many central bankers believed bubbles can't be spotted or tempered. But the Reserve Bank of Australia (RBA) challenged that view when it leaned against Australia's housing boom in 2002 by refusing to cut interest rates despite a world economic slowdown, opting instead to talk down the property market.
'Other countries are looking at the Australian example as a very positive one, and there are some lessons to be learnt from that episode,' said Brian Redican, an economist at Macquarie.
The bursting of the US housing bubble in 2007 after its unfettered rise brought the world economy and financial markets to their knees. In contrast, Australia's housing market has been remarkably resilient, supporting consumer confidence and helping Australia become one of a rare breed of developed nations to dodge a recession.
'Up until the crisis, it was received wisdom that central banks should probably target mostly inflation. That is now beginning to change very quickly,' said Frederic Neumann, a regional economist at HSBC in Hong Kong.
At the heart of a long- standing debate about monetary policy is whether central banks should target asset prices alongside inflation. Conventional wisdom says central banks should care about asset prices only to the extent that they affect inflation.
This is because bubbles are hard to spot, and economists can't agree on what counts as a bubble. Bubbles are usually defined as prices that have risen so far they deviate from economic fundamentals for an extended period. Yet, not all price rallies are unjustified.
'It's extremely difficult in reality to pin point,' said Mr Neumann. 'By the time you realise 'Oh we have a bubble in our hands', it runs so quickly it's almost too late to stop.'
The RBA deftly avoided the problem by talking around it instead, highlighting the economic risks of the housing boom.
'We should not get too hung up about trying to decide what is a 'bubble',' Glenn Stevens, current RBA governor and then deputy governor, wrote in a paper in 2003. 'It tends to promote the idea that if we can define something as not being a bubble, then we can forget about it.'
To build its case that property prices were getting out of hand, and unhappy that government data was not timely enough, the RBA took the unusual step of commissioning coverage on the housing market from private-sector firms.
It focused on ratios such as the ratio of income to home prices to gauge the amount of debt buyers took on, and the number of home loans taken out for investment housing.
Falling bank lending standards, rising innovation and competition among mortgage lenders also flagged market frenzy.
Lenders invented deposit bonds where they paid the first deposit for home buyers for a fee, and people competed in television shows to renovate and sell flats at a top price.
RBA officials attended property seminars to observe over-zealous salesmen, dubbed locally as 'property spruikers', who encouraged buyers to think home prices will never fall.
All that led the RBA to refrain from joining other central banks in cutting rates in 2002-2003.
Then RBA governor Ian Macfarlane went out of his way to talk would-be property buyers out of their investments. 'I'm using a certain amount of moral suasion to try and get . . . to investors, to make them sit back and think again,' he said in 2002.
The RBA was so forceful in talking down the housing market many suspected property prices dictated its monetary policy, which the RBA denied. The RBA's efforts worked, with annual growth in house prices halving to about 9 per cent in June 2004, from over 19 per cent six months earlier. By March 2005, they were up just 0.1 per cent. -- Reuters
Source: Business Times, 13 Aug 2009