Australia’s profitable banking sector, cautious lending practices and the “skilful counter-cyclical policies” of the Reserve Bank have been noted by Oxford University macroeconomist John Muellbauer, in a speech looking at the risks posed to financial stability from "boom-bust" housing cycles.
Muellbauer provided an overall positive assessment of Australia’s prudential and regulatory oversight in a paper published today by the RBA but delivered to the closed-door Bank for International Settlements (BIS) 24th annual conference held in Sydney in August.
The theme of the conference was ‘Property Markets and Financial Stability’.
In his paper titled ‘When is a Housing Market Overheated Enough to Threaten Stability?’ Muellbauer warns that Australia’s economy is exposed due to its dependence on China buying its raw commodities.
“Australia’s dependence on exporting to China and more generally its reliance on a permanent improvement in its international terms of trade does point to a potential vulnerability in other economic fundamentals,” says Muellbauer.
“If these fundamentals turned negative, the high levels of household debt in Australia could seriously constrain growth even though the appropriate exchange rate adjustment could very likely be managed without a rise in interest rates, and fiscal policy would also be available, given low levels of government debt.”
But Muellbauer does note that in terms of financial regulation, credit fundamentals are more “robust” in Australia than the US, Ireland, the UK and Spain due to “the relatively modest leverage and continued profitability of its banking system, as well as skilful counter-cyclical policies of its central bank”.
He also says that while Ireland and the UK resorted to “short-maturity money market borrowing” when securitisation markets dried up in 2007 "increasing their vulnerability”, this was not the case in Australia due to “far more cautious” lending practices in Australia and because banks remained profitable”.
Muellbauer also praises the RBA’s role in guarding against financial instability.
“Clearly, the quality of financial regulation and the general policy stance of the central bank is another important factor in judging the fragility of the fundamentals.
“In Australia, the Reserve Bank has long had a pragmatically cautious respect for the risks posed by credit and housing price booms, and has been decisive in raising rates to head off incipient booms; the Australian Prudential Regulation Authority has always been tough on bank supervision,” said Muellbauer
Muellbauer is professor of economics and a senior fellow of the Institute for New Economic Thinking at the Oxford Martin School, Oxford University. He is also a Fellow of the British Academy, of the Econometric Society, of the European Economic Association and a Research Fellow at the Centre for Economic Policy Research.
The conference, which took place between August 21 and 22, brought together central bankers and leading academics to discuss important policy issues concerning property markets and financial stability
Discussions examined measurement issues in property prices, housing finance, the effects of macro-prudential policies, the management of banks' risks and securitisation.