Transcript of Question & Answer Session Housing in the Endemic Phase

Right. Well, Luci, thank you again. It's the sort of speech that obviously you have gone and spent a lot of time specifically in this sector and I, for one, I'm going to have to go and read it rather closely. But there are a couple of things I want to ask you around that and then a couple of broader things, if that's all right, and I'd love some audience questions. So if I can repeat it's slido.com in the URL, and then you enter #UDIA and then you can enter your questions from there. So looking forward to questions.

Luci, just on the housing market specifically, you talk about the construction industry at capacity and that availability of materials graph, I mean, it kind of says it all. Over 20 per cent of firms having real, real issues. We see the trouble out there as journalists. I see it. Are you confident the sector's going to be able to manage it through?

Well, I think in the end, people find ways to manage and constraints are actually the precursor to creativity. A blank sheet of paper, no one knows what to do with it, but once you have a constraint, you start getting creative. I think the reality is the supply chain issues specifically are global and in recent months they have really intensified because of what's going on in China. And so we are seeing other disruptions. There were already disruptions right through the global economy, partly because of the pandemic and factory shutdowns, partly because demand had shifted away from services, which people weren't allowed to consume under lockdown. And so people instead, bought lots of goods, whether it was setting up your home office or no longer going to the gym so you buy one of those fancy exercise bikes – that's my world. You know, those are the things that have changed and so there was a combination of a demand shift and supply disruption that's created those supply chain issues. But that's only intensified because of the COVID outbreak in China and the government's response there. So it's really hard to say how long that's going to continue. All I can really say is there were signs that certain things were getting easier in terms of obtaining materials, but I think there's an opportunity for creativity.

I just want to make it clear that 20 per cent is 20 per cent of all firms.

It's not just the construction.

Yeah, it's not just construction. For construction it's probably higher. We don't know for sure from that survey, but certainly our liaison contacts are telling us, yes absolutely. But there are ways around that. It's ordering more. I mean, I'm sure many people have found, just coordinating things is hard. And so this may well actually spur an improvement in how people coordinate project management, sequencing activities, parallel processing activities. I think there are certainly ways we can adapt to this by changing the way we work and I think that's a lesson, not only for the construction industry, but everywhere.

So one of your messages today I thought was how important policy is for the sector. We've got a new government. We've got a shared equity scheme coming in, for first home buyers, young buyers. What sort of policies have had the biggest impact in your mind?

Well, I think what we've learned … We knew that monetary policy really mattered. We've also learnt that fiscal policy really matters. It was a very unusual 2020. We had the biggest contraction in GDP that we've seen since World War II, unemployment went up several percentage points and yet household income and small business profits actually rose. That's not what a normal recession looks like. That wasn't a recession. The government not only compensated for the income hole created by the necessary health restrictions, they more than compensated for that. And you know, we now have … households saved a lot of that, but they spent a lot of it as well. We now have a household balance sheet that's very strong. You can have these pervasive effects. There's $200 billion of additional saving that wouldn't have happened if the household saving rate had stayed where it was.

So you're talking about the broader fiscal policy really.

Broader fiscal policy. This the thing, I think it's the whole suite of policies. But obviously there are specific household, housing interventions that have specific effects. But you've got to see it all within one system.

So you were mentioning rates there obviously. I think in a little while in New Zealand, over the ditch, we're probably going to see 2 per cent cash rate coming through. I think they might peak at 3.5 per cent. What's your outlook? What's the Bank's outlook for a peak in rates? Could it get as high as New Zealand, because that housing market I think has come off about 10 per cent already.

I'm not going to speculate about where it's going to land. It is a very unusual period. We're in a world where inflation around the world has spiked and we've got very tight labour markets. And so you have a decline in real wages at the same time as a tight labour market. We really don't know. That's not actually happened before outside of, you know, there are a few episodes like Brexit where you had a big depreciation in the exchange rate, but that's not really a configuration that you've seen collectively across the advanced economy world. So, how that is going to play out, I don't think it's really sensible to make a prediction because we've got to be data driven. Four months ago, five months ago, we had a set of forecasts, but did we anticipate that Russia would invade Ukraine and what that would do to the price of energy around the world and how important that's been? I feel like making a prediction in the light of so many events just seems inappropriate. All I will say is that the Board has already said there's more from here, but we will be watching the data and the evidence very carefully and working out what the appropriate course of action is.

Yeah, so six months ago it was a different place, obviously. The Governor – very keen to encourage wages growth. When mentioning housing, if he did mention it, didn't seem that, you know, mortgage stress was high on the agenda. And in the last couple of months, I noticed he's talked about buffers and making sure that everybody understands where they are, really, is his implication. And I'm just wondering how comfortable you feel about the more leveraged end of the housing market and the buffers.

Sure. We've actually had that statement about making sure you have enough buffers in the monetary policy statement for quite some months now. That's something we've been thinking of. Whenever interest rates are lower than they're likely to be over the longer term, you need to think about that. And the important thing is whether you have the structures and systems in place to ensure resilience overall. And so the fact that in this country lenders are required by APRA to actually qualify people on a much higher interest rate than they're currently paying, and that's a requirement. In fact, that that required add-on has been increased recently. So it used to be 250 basis points, now it's 300 basis points. So when you go to your bank, they're working out whether you can service the loan at a much higher interest rate than what you're currently paying. And they're discounting certain forms of income. They may be assuming that you're willing to cancel at least a few of the streaming services you ended up with over lockdown, but they're making an assessment about your ability to manage your other financial obligations and the mortgage in very different circumstances.

Again, over in NZ, I mean, I think the RBNZ has recognised there's a lot of stress suddenly out there. Are we different?

My understanding is they do not have the same requirement. That add-on is not built into the prudential regulation. I may be incorrect on that, but that's my understanding. That's something that we've always understood. I think the other thing is, I mean, in New Zealand, they tend to have sort of one- to three-year fixed rate mortgages. So the issue of interest rates moving is far less salient to them. Whereas here in Australia, I mean, obviously recently, a lot of people got into fixed rate mortgages for a while because they were at very low rates and that looked very attractive, but we've always had a system where people are very cognisant that interest rates could rise and they make those decisions accordingly. There will always be people, unfortunately, who have sort of an unfortunate outcome in their lives. Whether it's a relationship breakdown or illness, there will be people who very unfortunately experience distress.

But that is part of the cycle, isn't it?

But it's separate from … the system is designed as best as possible to ensure that you don't end up actually causing a further problem.

No worries. I want to jump just a couple last questions, climate change. Now, obviously you lost a former Deputy Governor …

Yes.

… to Twiggy. It is something I know that the Governor and Deputy Governor were very engaged in. How do you see climate change now under the new government? Are there any risks in transition, the speed of transition? How do you see it?

Look, I think it really depends not only on the detail of the new government's policies, but the timing of them. And that's just something that is not possible to predict at the moment. I mean, I wish Guy well in his new endeavours, I think it demonstrates the importance of that issue to humanity and the globe that he made that decision.

That's come through in the election. My last question, because I think we're sort of running short now. Some people are muttering about a recession in the United States by the end of next year. What do you think the chances are of that happening, and what's the knock-on effect for Australia?

Certainly, they are muttering about it. You do hear this being discussed. I think the US is in a more difficult situation to Australia, but I think, again, it does demonstrate that policy really matters. In the US, they had a much bigger fiscal stimulus and so they're now having to recalibrate. And one of the ways I like to sort of characterise the differences, not only they have a much, much higher inflation rate and the prices that are rising are much broader based than here. It's starting to become more broader-based here, but it's nothing like what's going on in the US. But you know, while there is a lot of discussion here about labour shortages, if you look at the number of vacancies to the number of unemployed. At the moment, that's about six or seven vacancies getting up to eight, per 10 unemployed people. In the US, it's more like 17 vacancies for every 10 unemployed people. That's a genuine case where there just is a labour shortage. Whereas here, I think, there is an issue of, there's been a lot of change very quickly, there are vacancies you're poaching from another firm and then that firm has to poach from another firm and then all the way down …

But you think, that between yourselves and the new government, you can manage this curly cat of interest rates and inflation?

I would hope so. I think we've demonstrated that policy really matters and I think that sort of shared understanding that you need to think about both arms of policy will very much be front of mind.

Well, Luci Ellis, I want to thank you very much again for taking questions and also for, I mean, I know everybody was really fixed on what you were saying and those graphs up there, so thank you for taking the time to come here.

Thank you very much, Ticky.