Reserve Bank of Australia (RBA) assistant governor, Malcolm Edey, has spoken out against claims that Australia is facing a housing bubble at a financial services conference held in Sydney today. From the AFR:
“There is no doubt [house prices have risen] but we have to keep in perspective. House prices have risen at a rate similar or level to growth in household income,” he said.
“The ratio has been roughly flat or tending actually to fall. Within that trend there will be cycles and periods where that ratio rises or falls or the rate has been higher than average or lower than average,” Dr Edey told a financial services conference in Sydney on Wednesday.
“But we shouldn’t be rushing to reach for the bubble terminology every time house prices are above average because you will be unrealistically alarmist,” he said.
“This is a low rate environment and one of the effects it that it stimulates demand and housing. We are seeing that influence in the housing sector and that’s not surprising because its an interest rate sensitive sector,” he said.
Dr Edey pointed to Reserve Bank comments in its most recent meeting minutes that addressed rising house prices.
“We said then – indicated this is an area to watch but we do need to keep it into perspective,” he said.
Dr Edey’s claim that Australian house prices have grown in line with household disposable incomes is certainly true if measured over the past decade alone, although its ignores the fact that Australian housing remains very expensive (see next chart).
It also ignores the fact that the overall size of the Australian housing market remains highly inflated relative to historical norms:
Or that Australia’s banking system is already mortgaged to the hilt, heightening financial risks in the event that there was ever a disorderly unwind:
Interest rates will likely need to remain low for an extended period in order to place downward pressure on the currency and support trade exposed sectors as the once-in-a-century mining boom unwinds.
Given the risks of low interest rates feeding rapid house price inflation, why not move now to impose tighter restrictions on high risk mortgage lending, rather than: 1) waiting until the horse has already bolted; or 2) belatedly raising rates to cool house prices, in turn damaging the broader economy?
Further, if the RBA truly wants to see housing construction fill the mining investment hole, why is it not actively jawboning about the need for Australia’s various levels of government to get their act together on supply-side reform, rather than remaining silent on the issue? The RBNZ has taken such an approach, with both sides of politics in New Zealand now committing to fix supply bottlenecks.
