House price bull heaven

Property speculators are on cloud nine at the moment while the Reserve Bank plays cool on housing. But it won’t take too much more growth before the bank gets antsy.

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House prices are continuing to move solidly higher, driven by record low interest rates, a shortage of supply, strong underlying demand, rising incomes and a lift in wealth coming from a buoyant stock market.

It is nearly as good as it can get for the house price bulls.

About the only thing working against an even more powerful rise in house prices is the recent softness in the labour market, where employment has fallen in the last two months and the unemployment rate has increased by around 1 percentage point over the past year to 5.8 per cent. If the labour market was stronger, house prices would no doubt be rising at an even faster pace.

At the start of the year, most of the dynamics were already in place for house prices to rise strongly and it seemed likely that they could rise by 10 per cent or so in 2013 (All signs point to a house price hike, January 10).  

According to the RPData series, house prices are up 1 per cent so far in September and by 6.1 per cent since the start of the year. The 10 per cent increase for 2013 looks to be in the bag.

The question now is where to for house prices in 2014 and beyond? Is the rise in house prices threatening to distort investment decisions and therefore is it a threat to the stability of the financial system and the economy?

For now, the Reserve Bank is not all that fussed with the recent house prices gains, particularly when the recent rise is set in the context of the 7 per cent fall up to early 2012. In the minutes of the September board meeting released yesterday, the Reserve Bank noted the house price gains and that “recent data and information from liaison were consistent with further recovery in the established housing market and moderate growth in dwelling investment”. 

The Bank’s minutes did have a particularly interesting inclusion. They noted that the board “was briefed on developments in the New Zealand housing market and the macroprudential policy framework recently introduced by the Reserve Bank of New Zealand” (New Zealand’s bold move against the housing bubble, August 21).  

It is not clear whether the Reserve Bank would ever embrace such macroprudential changes, given its assessment that “the Australian banking system remained in a relatively sound position. Banks were well placed to meet the Basel III capital requirements... Members observed that banks' asset performance and funding structures continued to improve, and their profitability remained strong”.

This was a cool and calm assessment of the soundness of the financial system.

Critically for consideration of any concern (or the lack thereof) about a housing bubble, the Reserve Bank board minutes noted the “continued high rate of excess home loan repayments was consistent with low rates of financial stress among households with mortgages”. In other words, there are fewer concerning signs of financial stress in the financial system (A housing bubble? You bewdy! September 18).

Whatever the merits of the government or Reserve Bank considering non-monetary policy means to deal with any future unwelcome rise in house prices, it won’t take too many more solid monthly house price gains for the central bank to become antsy about the risks from what soon might be excessive growth.

While there is probably something to be said for some steps along the macroprudential path not only to take some of the heat out of house price gains, but also for reasons linked to stability in the banking and finance sector, good old fashioned interest rate hikes will also do the job, albeit with consequences for the economy away from housing.

The case for regulatory changes to tackle house price rises also loses weight given that housing credit growth is particularly slow at the moment and there is not a lot of evidence that the recent pick up in house prices is being driven by leverage. Another issue working against a macroprudential regulatory change is that it imposes another layer of red tape on mortgage providers and business and it might not even work. 

As has been demonstrated over the ages, price signals in markets work better than regulatory changes. Witness the success of the carbon price in reducing per capita electricity consumption and the increase in clean energy output over recent times.

For housing, those price signals come through higher interest rates which reduce affordability and raise the cash flow required by borrowers to fund a given level of debt. Less is borrowed, which dampens house price gains. Interest rate changes are clean, transparent, easily understood and do not impose a red-tape complication for borrowers or lenders.

Whatever the approach that may be taken, house price growth would need to accelerate further for it to become a problem. In the meantime, there is plenty else happening in the economy which may yet see the Reserve Bank move to a tightening bias and even deliver an interest rate hike early in 2014. The economy is lifting, global conditions are improving and inflation risks just might be moving up rather than down for the first time in more than four years. 

Either way, as Reserve Bank governor Glenn Stevens starts his second term at the top, the community can rest assured he and his board will get things right whenever they feel the need to adjust policy or if or when house prices become a problem.

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