Reserve Bank of Australia, Ian Macfarlane, Interest Rates, Home Affordability, Negative Gearing, Stamp Duty, Land Release, First Home Owners Scheme, Economy, Current Account Deficit, Trade, National Party

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Reserve Bank of Australia, Ian Macfarlane, Interest Rates, Home Affordability, Negative Gearing, Stamp Duty, Land Release, First Home Owners Scheme, Economy, Current Account Deficit, Trade, National Party



Press Conference

Tuesday, 29 July 2003

2.15 pm

SUBJECTS: Reserve Bank of Australia, Ian Macfarlane, Interest Rates, Home

Affordability, Negative Gearing, Stamp Duty, Land Release, First Home Owners

Scheme, Economy, Current Account Deficit, Trade, National Party


I am pleased to announce that today I have re-appointed Mr Ian Macfarlane as

Governor of the Reserve Bank for a term of three years, commencing when his

current term expires on the 18th of September.

Mr Macfarlane will serve through to 17 September 2006. That will mean he will

have served a period of ten years in the job. Apart from “Nugget”

Coombs, he is the only Reserve Bank Governor who has been re-appointed.

Mr Macfarlane requested that this second term be for a period of three years

to give him the opportunity to serve for ten and to retire at sixty. So, although

the normal period is seven years, the shortened re-appointment term was at the

request of Mr Macfarlane.

I have taken the opportunity in announcing this re-appointment to also re-issue

the Statement on the Conduct of Monetary Policy. This is an Agreement which

I entered into with Mr Macfarlane when the Government appointed him to his first

term back in 1996. It was the Agreement under which Australia set out its monetary

policy arrangements and set our inflation target, which is 2-3 per cent over

the course of the cycle.

An indication of how successful that Agreement has been, is that since that

statement was agreed between the Governor of the Bank and me in 1996, with an

inflation target of 2-3 per cent over the course of the cycle, inflation has

averaged 2.4 per cent, which is nearly bang on the centrepoint of the target

that we set.

The second statement updates the practice as has evolved under the first statement,

modernises it to some degree, but the essential tenets of the Australian monetary

policy arrangements remain the same. That is, we have an inflation objective

which monetary policy is directed towards. That the Governor agrees to appear

before Parliamentary Committees and to issue regular statements explaining his

role. The Government reserves the right to comment on monetary policy from time

to time as was the case in the first Agreement. And the Government acknowledges

the independence of the Central Bank, subject to the provisions of the Act of

course which provide for the mechanism should there be a major disagreement

between the Government and the Bank.

Before taking any questions I would like to congratulate Mr Macfarlane on his

re-appointment. He has served Australia very well as Governor of the Reserve

Bank. It has been a period of great success in the conduct of monetary policy

and economic policy and I wish him all the best in his re-appointment over the

next three years.


Now Treasurer, what’s the difference between the original Agreement and

this one?


There are no great substantive differences. There is some modernisation in

the way in which things have evolved but substantively the conduct of monetary

policy will be the same and I think that’s a great testament to the fact

that things have worked as well as they have since 1996.


But sorry, what does modernisation mean?


Well it means that where, for example, where practice has changed in procedural

items, we have just recognised that.


Treasurer, does this mean with Mr Macfarlane due to leave office at the age

of sixty, will Glen Stevens be the successor?


Well, the successor to Mr Macfarlane will be decided at that time, won’t



This business of retiring at sixty, is that an example that you would commend

to others?


Well can I say this, that I would have been glad for Mr Macfarlane to do another

full term. It was at his request that the term was made three years, he told

me that he was requesting that it be limited to three years because it gave

him the opportunity to retire from the job at 60, and he would have served ten

years in the job. As I say, I think he has been an outstanding Governor of the

Reserve Bank, I would have been happier if it had been a longer term.


Does you know what he wants to do when he retires?


No, I have no idea, no.


Treasurer the Bank hasn’t changed rates since December, why shouldn’t

they give out their opinion on how the economy’s going when rates are

left unchanged?


Well the Bank does, the Governor appears before, under my agreement, the Governor

appears before a Parliamentary Committee, it issues regular bulletins and it

keeps people informed of its thinking. And when it moves monetary policy, it

explains the reasons why. Now, I think you can assume that when it doesn’t

move rates, that’s because it assumes there is no need to do so, and I



Maybe for different circumstances. It may not be for the same reasons that

it spoke out when it moved rates. Why should…a decision not to change

rates is and can be every bit as important as a decision to change rates, why

should it not explain the reasons why it hasn’t moved?


Because I think the tendency to issue statements explaining why you haven’t

done something can sometimes cloud the issue. I have watched this with the Federal

Reserve in the United States. In order to make a statement, because they have

to make a statement, they make a statement saying nothing is changed but our

bias is this, or our bias is that. How do you interpret a statement which says

there is no need to change but we have a bias in favour of changing? What additional

information does that give you? I think actually sometimes when they get into

this hair splitting, with biases this way or biases that way, it can do as much

to mislead a market as to inform it. That’s my view. I happen to think

it’s the view of the Reserve Bank too.


Mr Costello, are you concerned that despite very low interest rates it appears

that housing prices and land availability are affecting home affordability,

particularly for first home buyers, and is there anything you can do about it?


Well let me make a couple of points. One is that no doubt house prices have

gone up because interest rates are low. And people can afford to pay higher

prices. Secondly, the fact that employment has been as strong as it has has

meant that you have got a lot more people who can, because of their job security,

enter into a mortgage. The level of home ownership in Australia has not changed

much. That is, we are not seeing more people owning their home, we are not seeing

less people owning their home. The proportion of the Australian population over

the last 20 years that owns a home is more or less static. Now, if you happen

to be in the market, the rise in home prices has been a good thing, because

people have been able to maybe borrow against their home, it has given them

an asset base, it has given them confidence, it has given them spending power.

If you are not in the market, the fact that prices have gone up means that it

is that little bit harder to get into the market, what we call a barrier to


One of the things that the Government has done, the Commonwealth Government

has done in relation to that, is we operate a First Home Owners Scheme. A $7000

grant if you have never owned a home before to get into the market. We introduced

that back in the year 2000 and so far in Australia I think there are 438,000

Australians that have received that, I’ll see if I can give you the precise

figure. 482,000 have received $3.7 billion since July of 2000.

Now, what else could be done to help new entrants into the market? Well a reduction

in state stamp duty would go a long way. And I have been raising this in the

House of Representatives on a near daily basis. Whilst the price of housing

has gone up, there has been absolutely no movement in the thresholds where stamp

duty applies under State Government law. That is, the same house which when

the rates were set was assumed to be a luxury house is now maybe even a first

home house. And the first home buyer is expected to pay what was considered

a luxury rate of stamp duty when those thresholds were introduced. I think the

State Governments could do a lot about stamp duty, and I have been raising this

for a long period of time.

It is also said incidentally, that releasing more land would be of assistance

in getting more supply on to the market, and that sounds to me a sensible idea,

whether or not there are drawbacks, maybe we should get somebody to have a look

at that.

But I want to re-assure you that the Commonwealth Government introduced from

1 July 2000, a First Home Owners Grant which has now gone to 482,000 people.

Now that only goes to people who have never owned a home. It is specifically

a First Home Owners Scheme, and that is because as I said before, if you are

in the market you have actually taken the advantage of increased prices, it

is only those people who have been outside the market that the movement in house

prices has worked against.


Treasurer have you thought of who the successor will be for Mr Macfarlane?


Look, in a general sense I have applied my mind to succession planning, but

obviously that won’t arise until 2006 and so I don’t think there

is any hurry, I think it is a decision which will be taken closer to the occasion.


Treasurer we have had some trade data out for June earlier this morning, pointing

to a possible record amount in terms of a second quarter current account deficit,

is that a concern?


Well the trade in goods and services for the month of June was a deficit of

$2.06 billion, which was larger than it was in May, but smaller than it was

in April. It was in line with market expectations, rural exports fell again

and that tells you that Australia is still in the grip of the drought and rural

exports remain 24.6 percent lower than a year ago, 24.6 percent lower. Capital

goods rose strongly, driven again by imports of civil aircraft, most probably

the renewal of the Qantas fleet. The fact that the capital imports rose and

in particular airlines are re-equipping themselves is good for investment and

long term income generation. But you will not see a big turn around in the export

story until one, the economies of our trading partners pick up so that they

have the capacity to buy more of our goods and services, two, the drought breaks

allowing our farmers to get back to full production. There have been some encouraging

signs in the last week. The only other thing that I would note is that services

exports rose and that may be the beginning of the end of the SARS effect which

would be a positive thing for our tourism industry.


Mr Costello given…


Laura then Dennis.


Do you think there is any significance in the fact that about half the declining

exports in the last twelve months or so has been in exports to Muslim countries?


No, I don’t think so.


You don’t think that there might be some other reason other than just

market decline?


Well I guess you are suggesting that there is some kind of trade embargo, I

don’t think that is the case. There is no reason to believe that is the


It could well be that a lot of our trade to those countries is agricultural

trade, I happen to know for example that the prime destination of Australian-made

cars is the Middle East, a lot of Muslim countries, they are at record levels,

I haven’t seen any evidence whatsoever of any trade embargo. Sorry, Dennis.


Mr Costello, given that the drought still is such a serious economic problem,

are you concerned that there is a question mark over the future of the leadership

of the National Party.


Well I am not sure that there is a question mark over it. I read in the paper

from time to time different people have different views as to what is going

to happen, but that is just what I read in the papers. This is a matter for

Mr Anderson, and I don’t consider there is any question mark, that is

a matter for him and for him alone.


Treasurer was there anything specific in Cabinet today about the issue of home

affordability and a possible inquiry into home affordability?


I don’t discuss what happens in the Cabinet, and much’n all as

I know you would like me to, I don’t discuss what happens in the Cabinet.




I will take, sorry, yes and then Dennis, and then one, two more over here and

that, OK. Cherelle.


Are you confident the economy can grow this year, for the remainder of this

year, at more than 3 per cent and can we keep the jobless rate at 6 per cent?


Well, our forecast is 3 per cent. Recovery in the United States is a big

part of the story, ending of the drought is a big part of the story. But the

Australian economy has been remarkably resilient. Even at a 3 per cent growth

in the current financial year, this is outpacing the other developed economies

of the world. Look what we have been through – a US recession, continuing

recession in Japan, Europe sluggish, the worst drought in 100 years, and the

Australian economy grows. Normally a US recession produces an Australian recession.

Normally a drought produces an Australian recession. You have had both, and

the economy continued to grow, very resilient.

Sorry, Dennis?


You mentioned before that you might have someone look at the availability of

land and housing prices. Is the Government considering having a look at home



Look, as I said earlier, one of the reasons why prices have gone up is that

interest rates are at 30 and 40 year lows. That is, people can afford to buy

a more expensive house or renovate an existing house. And if you are in the

market, you get the advantage of that. Now, one way to bring down prices we

know, because it was done in 1990 by the Labor Party, is to put up interest

rates. I am not contemplating that, Dennis, not contemplating that.


Negative gearing?


I am not contemplating that. I am not contemplating for a moment changing the

Government’s policy in relation to negative gearing, not for a moment.


What about…


Not even between Lateline and lunchtime would that thought enter into my head.

So, then you look at those factors that play in this area. Stamp duty is a big

factor, there’s no doubt about that.


Raise it at COAG?


I think it would be a good thing to raise at COAG, yes. I think it would be

a good thing to raise with the States. You see, what’s happened is this,

as interest rates have come down, prices have gone up, nobody has moved the

stamp duty rates. Not the rates and not the thresholds. And you have had in

some markets property go up by 30 per cent, year on year. Now you can imagine,

let’s suppose wages increased by 30 per cent, year on year, would you

be demanding that the income tax scales be changed? I think you would be. And

it strikes me as, I pay tribute to the States, I think they have managed to

get away with a breathtaking performance on this. But it’s about time

that there be a little bit of focus on it.


Treasurer, you spoke of the question of land availability…


I am going to take Jim, then Tim and then those two. That’s it.




There’s an NSC meeting going on at the moment.


Treasurer, about the question of land availability, has the Commonwealth got

a role here? Would it be able to help by accelerated release of Commonwealth

land within urban areas, particularly within Sydney?


I am not sure that the Commonwealth has much land. No, I don’t think…


You’ve got Badgery’s Creek.


I don’t think…




…the Commonwealth will be looking at that. It’s a question of bringing

land on to the market. Look, I note that it has been argued by the HIA and others

that releasing more land would help. I have heard it conversely argued, and

this is the argument that you will get from the States, that if you release

more land you have got to supply that land with services – sewerage services,

schools, hospitals, that’s why they claim they can’t release land.

Now, as of this moment I think it might be useful if we got some people to actually

look at this argument and shine some light onto it. But the point I am stressing

to you, is these are matters within the province of the State Governments. And

that’s why I think it would be a useful thing to raise it with the State


When we introduced the additional First Home Owners’ Grant of $7,000

we wrote to the States and said, since we’re introducing this additional

grant, and since it’s going to lead to new construction, and since it’s

going to bring people into the market and since that will put prices up, and

since you will get more stamp duty would you consider having a moratorium on

stamp duty or cutting stamp duty for first home owners? We are waiting for one

positive reply. Now these things are within the province of the States.

Now very briefly, Tim?


Mr Macfarlane and the Reserve Bank have said repeatedly that the surge in housing

prices has been driven by investors and that most investors are tax-driven.

With all the power at the Commonwealth’s disposal is there absolutely

nothing you can do to address this crisis in housing affordability?


I don’t believe that changing negative gearing would make a positive

impact because we know what it does, it drives up rents. And to think that you

would embark on a policy to drive up rents in the name of increasing housing

affordability would make the problem worse. The one thing that that does is

that it leads to supply which keeps rents down. And in the current context,

I have heard people argue for short periods of time, at least 12 hours, that

we should change negative gearing. The Government is not attracted to that and

will not do it.

Sorry, Greg?


As interest rates have stayed low and housing prices have soared, the First

Home Grant that you referred to has stayed where it is. Have you given any thought

to either indexing that or increasing it to take account of the higher prices

being asked?


Well, that’s the amount that the Government announced. We did increase

it for a while to $14,000 and we brought it back. But we won’t be changing

the amount. That’s the amount that we’ve agreed on. That’s

the amount we’re paying, we’re paying it to 482,000 and I would

say to anybody that wants it, don’t hold back thinking it might go up,

exercise it.


Treasurer, I just wanted to ask you, given that we could see our current account

deficit blow out to 4 or 6 per cent of GDP, are you worried about how the rest

of the world will view Australia given that situation?


Look, I think it’s important that we keep an eye on our current account

deficit. I am not somebody that says it should be totally ignored. But we have

been in this territory, we have been further than this, we have been further

than 6 per cent and we have done it when our Budget’s been in deep deficit

and we’ve done it when our interest rates have been high, so we’re

much better placed, particularly if you think, as I do, that a large part of

it is the weakness of the world economy and the drought, both of which will

pass, eventually. I just hope they pass soon. Both of which will pass, but until

you get recovery of the world economy, people are not going to have the money

to buy our exports to the degree that they did. And that’s why we want

a world economic recovery. By the way, I think the world would be much more

worried and concerned about the US current account and budget deficit because

of the dramatic sums that are involved which dwarf anything here in Australia.

Sorry, Matthew?


It’s been noted that someone on a nurse’s wage in Sydney can’t

afford a house anywhere in that city at the moment given their income. If you

talk about the need for maybe having a look at affordability issues, do you

think they will be satisfied by that response?


Well, I think you have got to be careful here, somebody on a nurse’s

wage who has bought a house or owns a house in Sydney can of course, they’re

in the market. What you are talking about is somebody on a nurse’s wage

who is not in the market and has never come into the market. And the one thing

I can promise you is this, that those people who currently own homes don’t

want to see the prices come down. Let me assure you of that. If you’re

a current homeowner, you don’t want to see the prices come down. So, let’s

be very, very clear about this point, what group of people we’re talking

about. We’re not talking about those that own homes, you are talking about

those that do not own homes, are outside the market, and want to come in for

the first time. That’s why I say this is an issue for your first homebuyer,

your first homebuyer. Not your second home buyer, your third home buyer, somebody

who’s currently got…that’s why I say, the Government has a

First Home Owners’ Scheme. Now, for those people, what else would help

them to come into the market? I make this point, you buy a house today, you

pay what’s called stamp duty, it’s just a stamp that goes on a piece

of paper, that’s what it is, except it can cost you, I think in Sydney

it costs you $16,000 for that stamp. Now, we ought to have a look at some of

those issues.

Thank you very much for your time.