Last Updated May 9, 2011 5:08 PM EDT
We all know that Australia has some of the most expensive housing in the world. There are various theories about why this might be --- migration, lack of zoned land, availability of finance --- take your pick.
We also know that inflation is a real danger for our export-fuelled two-speed economy. When prices get out of control, central banks normally step in with higher interest rates. Let's hope they are a little more cautious over the mid-term. Prices not directly related to housing have been influenced by disasters, foreign wars and the inept management of utilities. They have pushed up the price of food, oil and electricity --- mostly essential, non-elastic items. In other words, the RBA can push up interest rates all it likes, but it won't impact the price of these items; all it will do is hurt those struggling to pay for them.
It's clear the real issue it is focusing on is house prices. To demonstrate, below is a graph showing inflation rates for the UK and Australia. The inflation rate here is based on a price index that excludes housing, financial and insurance costs. You can see how inflation is a bigger issue in the UK than it is in Australia --- in the last five years prices have risen at twice the rate there. Yet the UK interest rate has remained at an historic low of 0.5 percent for almost two years. In Australia, the RBA was quick to bounce out of the global financial crisis pushing up rates from late 2009 to a level which now just a little shy of 8 percent.
Why has the Bank of England been reluctant to lift their interest rates, particularly considering inflation seems to be such an issue? Simply because their house prices haven't recovered from the financial crisis. The average house is still worth less than it was five years ago. Meanwhile they still have the same problems with rising fuel, food and utility prices. It's a similar story for the US.
Australia, meanwhile, has seen house prices continue to rise --- it's 35 percent up on five years ago.
Yet the RBA and the Treasurer tend to publicly point to inflation as being the issue. Of course, if they came out and said: "House prices are so out of kilter with the rest of the economy that we need to use our only blunt instrument to keep them in check," the message would devastate the housing market and lots of Aussies would see their net worth plummet. Mind you, the more evidence that appears for this over time, the more likely this will happen no matter what the suits try to tell us.
ABS House Price Indices - Eight Capital Cities
ABS Consumer Price Index - March 2011 (Tables 11 and 12 International Comparisons) Bank of England and RBA offical bank rates
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