Greg Roberts article in CT Jan 21st on housing affordability, and your editorial on stopping inflation are related. In Australia too much money chasing housing is both helping cause inflation and causing house prices to become unaffordable. The amount of money created for house loans in November 97 was 22 billion dollars. Of this 20 billion was borrowed to buy existing houses while 10% or 2 billion was borrowed to buy new houses. The money supply in Australia is increasing by 20 billion each month to finance the purchase of existing houses and drive up the prices of all houses. The pressure could come off house prices with an increase in the interest rate on loans made to purchase existing houses. That is, instead of the reserve bank causing interest rates to go up for all loans by a general increase it could achieve a significant slowdown if new loans for existing houses had a surcharge. This money would increase bank margins to compensate them for the reduction in total loans. The scheme could be introduced with an agreement of the banks in a meeting chaired by the Reserve Bank. The reduction in money supply needed to ease inflationary pressures, and the interest surcharge to achieve this can be estimated and the surcharge can be removed when the inflationary pressures ease. The effect is likely to stabilise house prices and cause a reduction in the rate of inflation.
22 Yirawala St