If only inflation had also measured the price of houses and not just rentals, a lot of problems could have been avoided.

Sir, Jamie Smyth reports on “the end of a five-year expansion, which saw house prices in Australia’s biggest city rise 70 per cent and household debt surge above 120 per cent of gross domestic product — one of the highest levels in the developed world.” “End of Australia housing boom sparks fear of disorderly crash” September 7.

In the housing sector inflation is solely measured based on the rentals, which surely lag house prices. In 2006, in a letter that FT published, I asked: “Who on earth has decided for that the increase in the price of houses is not inflation? And so what should perhaps be argued is that really our monetary authorities have not been so successful fighting inflation as they claim they have been.”

If inflation had also partly measured house prices, it would not have shown such low figures, and then inflation targeting central banker would have had to tighten monetary conditions, and bank regulators, their credit and capital requirements conditions. 

How central bankers can just turn a blind eye to it could have something to do with that a great majority, or perhaps all of them, are house owners, and therefore only see good in the value of their houses going up. Now when things are getting out of hands, let’s make sure they are not given any preferences, so that they can learn the lesson in ways that helps them to remember it.

The political convenience of helping house buyers with preferential access to credit only results in house prices going up, and thereby having to provide even more preferential credit. Of course Saul Eslake of University of Tasmania is right arguing, “a gradual deflation of property prices, though painful for some, will do more social good than harm.”

Sir, as I have often written to you, much better that helping young buyers with affordable credits to buy houses is helping them to afford houses, c'est pas la même chose.

A house used to be a home; now authorities made these homes and investment assets. The journey back to being solely homes will hurt, many, a lot. The alternative of inflating ourselves out of the mess could be even worse.

PS. And when push comes to shove are not shares just another type of assets to be included in inflation calculations?

@PerKurowski

In relative terms, banks finance too much house buying, and too little the job creation needed to serve the mortgages.

Sir, Kate Allen reports: “Last year the BoE introduced tougher mortgage lending rules and warned that a possible resurgence in the country’s pre-credit crunch house price boom risked derailing Britain’s economic recovery’ “ECB easing raises fears on house price bubble” July 21.

But what BoE is not mentioning or doing a lot about, is the fact that allowing banks to hold less equity financing mortgages, than when financing for instance SMEs, means that banks will perceive they can obtain higher risk-adjusted returns on equity when financing mortgages than when financing SMEs; which means banks will, relatively, finance too much mortgages and too little SMEs… or as I prefer to phrase it… too much house buying and too little jobs with which serve the resulting mortgages… and the utilities.

@PerKurowski

Given the inevitability of the bust we need to make more of the boom

Sir Willem Buiter in “Welcome to a world of diminished expectations” August 6, takes the role of a neutral and detached observer when he rightly acknowledges the unavoidable boom-bust cycles in the economies around the world and looks into the future for clues. That is good, but how much better would it not be if he had dared to make some recommendations on how to go about to make the most of the boom-bust cycle itself. I mean, when I have a hangover, much of the way I feel about it, has to do with whether the party was worth it or not.

At this moment we live in a world where financial regulators are only concerned with avoiding the bust, but is it not time for them to start thinking more in terms of helping to make the most out of the boom? The worst part of today’s headache with the financial system, is that the party seems not having been that good, except of course for some of the financial intermediaries who enjoyed it enormously.