RBA deflates talk of housing bubble
With house price growth at a three-year high and mortgage lending picking up, authorities are on alert over the risks that could arise from any lapse in lending standards.
But the Reserve's assistant governor responsible for financial stability, Malcolm Edey, on Wednesday played down suggestions a bubble was forming, saying prices had moved in line with people's incomes over the past decade.
The chairman of the Australian Prudential Regulation Authority, John Laker, also signalled it would only consider imposing tougher credit rules on banks after it had engaged more closely with the sector over its lending practices.
Dr Edey said there was "no doubt" demand for housing was rising, but it was critical to keep the trend in perspective.
"Looking back over the last 10 years or so, house prices have risen at a rate equivalent to or on average less than the growth of household incomes," Dr Edey said at a Financial Services Institute of Australasia conference in Sydney.
The percentage of disposable income that households have tied up in housing has fallen slightly over the past 10 years, figures from the central bank show.
Dr Edey said there had been periods when prices had risen more quickly than incomes over the decade, but that did not equal a "bubble".
"We're in one of the higher-than-average periods at the moment, but we shouldn't be rushing to reach for the bubble terminology every time the rate of increase in house prices is higher than average, because by definition that's 50 per cent of the time," he said.
"You're just going to be unrealistically alarmist by making that call every time that happens."
Latest figures from RP Data-Rismark show that capital city home prices rose 4 per cent in the three months to August, the strongest growth since April 2010. Housing credit growth has also picked up from record lows, driven mainly by investors.
But the drop in the cash rate to a record low of 2.5 per cent and boom-time auction clearance rates in Sydney have sparked some predictions of a looming surge in house prices.
SQM Research this week forecast Sydney home prices could surge by 15 to 20 per cent in 2014, on top of 9 to 12 per cent growth this year.
While the RBA and APRA acknowledge the risks posed by cheap credit, both argue low interest rates are in Australia's best interest to help the economy cope with falling resources investment. Dr Edey said the bounce in the property market was "not surprising" as lower interest rates were meant to boost this part of the economy.
The debate comes amid growing discussion internationally over the use of "macroprudential" policies to restrict high-risk lending by banks. New Zealand recently introduced a limit on the number of new loans for more than 80 per cent of a property's value.
Asked if Australia might consider a similar move, Dr Laker signalled APRA would engage with banks before going down that path.
"We've used those tools in the past ... but there are a range of other actions a prudential supervisor can take before recourse to macroprudential instruments."
Despite the debate over house prices, most analysts agree with the Reserve that it is premature to be discussing bubbles.
Dion Hershan, head of Australian equities at Goldman Sachs Asset Management, said it was "way too early" to call a boom in housing.
Frequently Asked Questions about this Article…
The Reserve Bank’s assistant governor Malcolm Edey and most analysts think it’s premature to call a housing bubble. The RBA says recent price rises have moved broadly in line with household incomes over the past decade and that periodic faster growth doesn’t necessarily equal a bubble.
House price growth and housing credit have picked up as the cash rate fell to a record low of 2.5%, which is intended to boost parts of the economy. RP Data‑Rismark reported capital city prices rose 4% in the three months to August, and much of the credit growth has been driven by investors.
Regulators (the RBA and APRA) acknowledge the risks from cheap credit and rising investor lending but argue low rates support the wider economy. The message for investors is to monitor lending standards and credit growth—regulators are watching and could act if risks increase.
Macroprudential policies are tools to restrict high‑risk lending (for example, limits on high loan‑to‑value lending). Internationally they’re being used—New Zealand recently limited new loans above 80% of value. APRA signalled it would engage with banks and consider supervisory actions before resorting to macroprudential instruments in Australia.
According to the RBA, over the last ten years house prices have risen at a rate equivalent to, or on average less than, the growth of household incomes. The central bank also notes the share of disposable income tied up in housing has fallen slightly over that period.
Some forecasters are bullish—SQM Research projected Sydney home prices could rise 15–20% in 2014 on top of 9–12% growth this year. However, other market professionals, such as Dion Hershan at Goldman Sachs Asset Management, say it’s ‘way too early’ to call a housing boom.
Regulators are watching signs like rapid housing credit growth, lapses in lending standards, strong auction clearance rates, and heavy investor activity. APRA has said it will engage with banks and may use a range of supervisory tools before deploying formal macroprudential limits.
The article’s tone suggests keeping the housing trend in perspective rather than reacting to alarmist 'bubble' calls. Everyday investors should track interest‑rate moves, lending standards and credit growth, consider how price rises compare with income growth, and avoid making decisions based solely on short‑term price spikes.
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