BAD news for anyone still hoping the Reserve Bank will pull Australia’s house prices out of their slump. House prices have fallen for many months now, but the RBA is still worrying they are too high.

When the headlines are all about house price falls that are turning out to be bigger and longer-lasting than expected, Australia’s monetary chief is indicating that falling house prices are fine by him.

RBA governor Philip Lowe appeared at a conference in Portugal last week, alongside his counterparts from the US, Europe and Japan. In their company, he delivered some unscripted remarks that seemed unusually candid.

Instead of being deliberately positive and vague, the RBA chief made it clear what he was worried about.

“We have very high levels of debt, very high levels of asset prices, that’s our number one domestic risk,” Mr Lowe said.

The asset prices he refers to are house prices and the debt is mostly Aussie mortgages.

Australia’s household debt is famously high, as the next graph shows, and the Reserve Bank is clearly frightened of how much of a powder keg that is. Debt makes any crisis much harder to manage, and our ability to manage a crisis is much diminished due to the low levels of interest rates and the fact the Budget is in deficit.

A fall in house prices that discourages people from accumulating even more debt could be just what the RBA is after — so long as it doesn’t turn into a sharp crash.

Recent price falls have been relatively modest at a national level. House prices are only 0.4 per cent lower than they were a year ago. The main reason that feels like a big fall is that Australians got used to big gains.

What we may get instead of gains is a long period where house prices are below where they were. This next chart shows several previous instances where house prices fell in Sydney. As you can see, falls can easily extend beyond the 4.2 per cent drop Sydney has seen recently (the black line).

Nationwide, prices have fallen in the past eight months. Those eight months have eaten away at the growth in the four months prior so that the average person who bought in the past 12 months finds their property is worth less than they paid.

If price falls continue, the proportion of Australian homeowners in that situation goes up. That could be very uncomfortable. New homeowners might feel like they are drowning. But the RBA is unlikely to come to their rescue.

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Rather than cutting interest rates, the RBA governor has said he expects the next move in interest rates to be up. But he also delivered a deathblow to anyone who expects rates to go up any time soon

“The inflation rate has been below the midpoint of our target for some time and it is going to stay that way, I think,” he said.

(Interest rates are used to manage inflation. Cutting rates is supposed to fire up the economy, discouraging saving and encouraging spending, while encouraging firms to take out loans to build new factories etc. All that activity is meant to create inflation. To cut inflation back down, they normally raise interest rates, which does the reverse.)

STUCK IN THE MIDDLE

It seems like the RBA is stuck. It would like to cut rates to encourage inflation and wages growth, but it can’t because that would raise house prices. It would like to have raised rates to curb house prices, but it can’t because that would kill wages growth and inflation.

Why is the RBA stuck? Because it two has two targets, and only one gun to shoot. (The targets are house prices and inflation; the gun is interest rates.)

The system wasn’t supposed to work like this. The RBA is actually not supposed to be in charge of house prices. Instead of leaving it up to our independent RBA, our elected government could have shot its guns at house prices at any point in the last decade. It has many guns — taxes, fees, rules on lending. But until recently the government has

mostly left it holstered.

The policy vacuum from the government over the past decade has forced the RBA into a corner. And the only way for it to get out of that corner is to wait.

Australia’s inflation is lower than the RBA’s target, but Mr Lowe made it clear he did not want to cut interest rates to try to raise inflation. “I see the risks being quite large from trying to get inflation up more quickly,” he said. “It would be mainly through people borrowing more money and having higher asset prices.”

Jason Murphy is an economist. He runs the blog Thomas the Think Engine