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

With current bank regulations a pervasive drop in economic dynamism should come as no surprise

Sir, Sam Fleming writes: “The US has seen a pervasive drop in economic dynamism in every one of its states since the early 1990s as new business formation sinks and workers move jobs less frequently, according to research that underscores the challenges in restoring entrepreneurial verve.” “Fall in US dynamism underlines Trump challenges” May 24.

How could that not be? Since 1988, our banks are in hand of regulators who decided that, in order to make banks safer, it would be better for these to finance home ownership, which can somewhat reduce mobility, and to avoid financing the risky, such as SMEs and entrepreneurs, those number one economic dynamism providers.

It amazes me how so few understand the distortion in the allocation of bank credit to the real economy that the risk weighted capital requirements cause. The day the world wakes up to that fact, the regulators will have a lot of explaining to do… perhaps even in front of International Courts of Justice.

@PerKurowski

There is a huge difference between poor and insolvent

Sir in “The year the god of finance failed” December 27 you mention as an example of government patronage “the effort to promote home ownership among the insolvent.” That is plainly wrong. Too much importance has indeed been assigned to home-ownership, in general, like the tax deductibility of interest paid on mortgages; and much of those efforts have been destined to help the poor, but no one has on purpose given assistance to the insolvent.

There is a branch of liberal radicalism on the web and that in their opposition to any sort of government intervention try to place the responsibility for this crisis fully on the shoulders of Fannie Mae and alike. The real truth is though that more than loans to insolvent borrowers most of the lousily awarded mortgages to the subprime sector were part of the production of attractive alternatives to investors that capitalized on too easily obtainable triple-A ratings.