Will the RBA repeat its mistake and whack households again? Gottliebsen

As the mountain of unsold houses on the Australian east coast rises each week, so the array of suggested solutions starts to increase. Given the rises in dwelling prices that we have seen in recent years, the current fall of around 10% in many areas is probably a good thing, although a big surprise to the community.

The danger arises if those 10% falls become 15 or 20% or – most unlikely – the 40% slump we have seen in Noosa. There are three groups that may have solutions – the government, the big banks and the Reserve Bank.

It is clear that first home buyers are now pulling back from the market, sensing that there is no hurry.

And so leading mortgage broker Loan Market suggests that the first home buyers grant needs to be increased, pointing out that it has been frozen since 2000 and property prices have doubled.

Of course, during the global financial crisis, a temporary boost to this grant, accompanied by a dramatic fall in interest rates, is what sent dwelling prices skyrocketing and sucked a vast number of people into buying houses which they could not afford.

Many are now having trouble paying off the big loans they committed to, given higher interest rates and utility charges. Their struggles have not been lost on their friends who are understandably now much more wary about buying houses.

Given the drive to balance the federal budget and the plan by some zealots in the Reserve Bank and Treasury to throttle the eastern coast economies to make way for the mining investment boom, we are not likely to see a change in the first home buyers grant. But as home building activity subsides further the pressure will mount.

Banks have a terrible dilemma. It was their decision to lend large sums to those who could not afford houses that really pushed up the prices. The biggest single force governing house prices is the level of bank credit.

Now banks are tightening up and contributing to the unsold houses and the fall in the market. If they take that process too far, they will trigger a major fall and increase their level of problem loans and later bad debts.

There is no doubt that the Reserve Bank took interest rates too high in 2008, then plunged them too low in the global financial crisis.

The Reserve Bank may have yet again taken interest rates too high but still have more rate rises in the pipeline. They are motivated by the inflationary consequences of the Fair Work industrial relations legislation and the enormous mining investment boom.

At the moment the Reserve Bank is merely saying it may lift interest rates, perhaps in the hope that jawboning will cause wage and price restraint. Leaving aside the global mess, if they take higher interest rate action the flow-on effects will be so severe that, in time, they may be forced to once again reverse direction. If that happens, it will put the Reserve Bank’s decision-making process under intense scrutiny.

One mistake is understandable. Two puts you under pressure. In most parts of the community, three mistakes and you are out – but those rules do not apply to the Reserve Bank.

In summary, holding the housing market depends on the big banks and the Reserve Bank, but both are looking the other way.

This article first appeared on Business Spectator