Reserve Bank of Australia entering the landlord business

April 21st, 2008

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Last Friday and today, The Reserve Bank of Australia (RBA) got move involved in the landlord business by buying up a total of AU$1.1 billion of mortgages. Effectively, the RBA produced AU$1.1 billion from thin air and lent it at around 7.8% to banks, who in turn lent it to mortgage borrowers at above 9%. Most of that money had to be repaid to the RBA in around a year’s time. Since October last year, the RBA had been buying up around AU$2.64 billion worth of mortgages (source of RBA’s market operations data can be found here).

Let us give you a sense of scale of how big those landlord business transactions were. As at February 2008, there were around AU$218 billion of securitised housing loan (see Rising price of money through the demise of ?shadow? banking system for the meaning of securitisation). Therefore, the AU$2.64 billion of mortgage purchase constitutes 1.2% of the February 2008 securitised housing loan figures.

For now, we are not trying to read too much into this. The RBA is not the only central banking getting involved in the landlord business in the name of providing liquidity. What might be the possible repercussions if the RBA had not done that? Keep in tune!

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