A common refrain cropping up in discourse today is that the housing market is too big to fail. That the government won’t let house prices fall. These feelings have only been exacerbated by the Reserve Bank’s recent announcement that it will roll out a funding for lending programme, where it will lend up to $28 million to banks at the ultra low official cash rate of 0.25%. The purpose of which is to keep interest rates low, or perhaps even lower for borrowers.

The interpretation of this that a lot of us have made, incorrectly in my opinion, is that the government does not want house prices to fall and will do anything to stop it from happening.

This is the incorrect conclusion to make. The Reserve Bank has no obligation to control house prices. Their responsibility is to control inflation and unemployment, whilst ensuring a robust financial system that minimizes the risk of financial shocks.

What this translates to is that they don’t want inflation to increase higher than 3% or lower than 1% per year, nor do they want unemployment to creep up. If a choice were to be made between having to address high inflation or unemployment vs a risk to house prices, they will always address the inflation and unemployment factors as the main priority.

Home loan affordability is a combination of house prices and ongoing annual housing costs. When interest rates are low, houses tend to be priced higher due to easier serviceability of mortgages. As a result, total affordability doesn’t tend to change too much. So the natural conclusion to make is that an increase in interest rates will be one of the most likely contributors to a slowdown in house price increases.

Many people can only afford houses now because of such low rates. An unexpected increase in rates could be catastrophic for many up to their eyeballs in debt.

Most are predicting interest rates to remain low for many years and could well be true. But nothing in life is ever 100% guaranteed. With all the money printing and many home owners feeling rich with their recent increases in house price, if the Covid vaccine comes into play next year, I would not be surprised by buoyant optimism and increased consumer spending.

This can easily result in the Reserve Bank increasing interest rates to curb spending to remain in their targeted inflation band of 1-3%. The government won’t be able to stop it. They would much rather inflation kept in the target band and not run away, than they would care about house prices.

I mean, think of the alternative. If the Reserve Bank were to increase interest rates now to help the housing market, then what effect will that have on the economy? People will save more and spend less. Businesses will borrow less and spend less. With people spending less, inflation could drop well below the Reserve Bank’s target band. This could mean higher unemployment due to lower consumer and business spending and confidence.As the Reserve bank is measured on employment rate, and not housing affordability, that would be a disastrous result for them.

I think the argument, which many people hold, is flawed. The housing market is not too big to fall in my opinion. It can happen.

Will it? Who knows.

The point is it COULD happen, and the government won’t be able to stop it. Momentum is often an untamable beast.

I write this today as there is a lot of overconfidence. Housing has delivered great returns in recent memory. BUT, it still remains a very undiversified asset.

The biggest risk to one’s plans is a risk that they didn’t see coming.

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