Question

Describe the key monetary and fiscal tools used by the government and RBA to control the demand of residential and commercial property. Illustrate with relevant examples and comment on the effectiveness of these tools.

Answer 1

First let us talk about monetary policy and RBA. In determining the monetary policy, the Bank has a duty to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people. To achieve these statutoty objectives, the bank has an inflation target and seeks to keep the consumer price inflation in the economy between 2-3 per cent. Monetary policy involves setting the interest rates on overnight loans in the money market ('the cash rate'). The cash rate influences other interest rates in the economy, affecting the behavior of borrowers and lenders, economic activity and ultimately the rate of inflation.

If the RBA were to control the demand of residential and commercial property in Australia, meaning it wanted to reduce the demand, it would increase the cash rate. This would lead to increase in the overall borrowing rate for residential and commercial property, since banks will pass on this rate increase to the consumers. With the increased rates, people might no longer be willing to buy property, waiting for a more opportune time to arrive.

Now moving on the fiscal policy and the government. Fiscal policy represents government spending policies that influence macroeconomic conditions. It quite simply means budgeting and allocating funds and resources. Through fiscal policy, regulators attempt to improve unemployment rates, control inflation, stabilize business cycles and influence interest rates in an effort to control the economy.

If the government wanted to control the demand of residential and commercial property, it would need to reduce its spending on the real estate sector. By reducing spending, the government is signalling a shift in policy and this would lead to increase in interest rates. With the increased rates, people might no longer be willing to buy property, waiting for a more opportune time to arrive.