Speech Summary National Wealth, Land Values and Monetary Policy
Address to the 54th Shann Memorial Lecture
The speech looks at the concepts of private and public sector balance sheets through the prism of the work of distinguished economist Edward Shann. The scene for the speech is set with a description of some of Shann's key learnings: understanding of the dangers of leverage; the importance of ensuring assets generate a positive net return; and the difference between current economic activity and the accumulation of wealth. And the speech highlights Shann's interest in land (its price, value and financing), suggesting that this interest has endured as a national fascination.
The speech goes on to consider the make-up of Australia's ‘national balance sheet’ and it notes the technical difficulties and measurement challenges in putting such a balance sheet together. In looking at the Australian Bureau of Statistics' estimates of the national balance sheet, the speech draws out a number of elements. It observes how national wealth has, over recent decades, for the most part increased, at a faster rate than GDP. It picks out that land is the asset class with the highest value and highlights how the rise in land values has contributed to the increase in the ratio of net wealth to GDP. And it notes how the structure of the balance sheet has changed over time, with increases in the value and importance of net foreign assets and liabilities and our mineral and energy resources. In this context, there is discussion about the importance of investment to ensure ongoing increases in our capital stock. It opines that well thought out infrastructure planning and investment is particularly important in lifting the nation's productive capacity.
The speech then moves to exploring the implications of the rise in land values in recent decades. It suggests that there are a number of structural factors involved in the increase: the combination of financial liberalisation and a return to low inflation in the 1990s; the interaction of strong population growth and the difficulties in increasing the effective supply of land for residential building; and possibly, in a small part, upward revisions to people's expectations of future income growth. The speech then discusses whether rising land values really make us better off as a nation, concluding that the main effects are probably on the distribution of wealth. It then sets out some examples of how high land values change the distribution of wealth, including across generations.
The speech then considers how three elements of the discussion are relevant to monetary policy. First, it looks at the two channels through which higher land prices might feed through into spending behaviours: the wealth channel and the collateral channel. The speech then focuses on the issue of ‘liabilities and risk’ and how the increase in debt that has accompanied the rise in land prices might mean that changes in interest rates now have a bigger impact than they once did. And finally, there is consideration of the need to generate sustainable growth in the economy through investment in physical and human capital.