The central bank of Australia recently raised short-term interest rates by a quarter of a percent to 4.25%. This is the fifth interest rate increase for the Australian central bank in the past six months. Australia originally began incremental increases in the short-term rate in October 2009. America’s central bank, the Federal Reserve (the Fed), has made none — and for very different reasons.

The rate increases were driven primarily by the need to stabilize the Australian housing market.

first tuesday take: America missed out on the sort of housing recovery currently underway in Australia since the Fed failed to lean against and tame our developing real estate bubble during the past decade — which the Fed could well have done.

In 2003, both America and Australia faced rapidly increasing real estate prices due to speculation. Many homeowners also joined in on the speculation game by pulling the equity out of their homes in order to purchase a second single family residence (SFR) as a rental income property (buy-to-let), a big deal in entrepreneurial Australia.

The difference: Australia’s central bank leaned against the rise in the real estate market to avoid excessive sales volume and bubble pricing. By keeping their market from bubbling and imploding, they leveled out the highs and the lows of their real estate sales cycle and kept the real estate market in check. In contrast, our Fed let the real estate market-party continue until all parts of the entire system came crumbling down. The Fed declared then that it is easier to clean up the mess of an imploded bubble (which we are now experiencing) rather than lean against the bubble and flatten out the sales cycle to avoid an implosion.

Our current real estate market situation is the resulting hangover from the Fed’s failure to cool off the market — which they intentionally did not do. The Fed is the sole entity capable of cooling off an overheating real estate sales and mortgage market, but it is still reluctant to commit to recommended reform to avoid the present chaos the next time around (in 2016 or so). [For more information on leaning markets vs. cleaning up after markets, see the first tuesday October 2009 article, Preventing the next real estate bubble.]

Re: “In Australia, Interest Rate Is Raised a Fifth Time” from The New York Times