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.
With Madeleine Heffernan
Frequently Asked Questions about this Article…
No. The RBA has dismissed talk of a housing bubble as “unrealistically alarmist.” Assistant Governor Malcolm Edey said price moves over the past decade have been broadly in line with household incomes and that it’s premature to label recent stronger growth a bubble.
Lower interest rates are a key factor. The cash rate has dropped to a record low of 2.5%, which was intended to support the economy and has helped boost the property market. The article notes mortgage lending and housing credit growth have picked up, with investors driving much of that growth.
According to RP Data‑Rismark, capital city home prices rose 4% in the three months to August — the strongest quarterly growth since April 2010.
APRA’s chairman John Laker signalled the regulator would engage closely with banks about lending practices before imposing tougher credit rules. He said there are several supervisory actions available and APRA would consider macroprudential tools only after engagement.
Macroprudential policies are rules aimed at restricting high‑risk lending (for example, limits on very high loan‑to‑value loans). New Zealand recently introduced a cap on the number of new loans above 80% of a property’s value. APRA said it would consult with banks and consider a range of options before resorting to similar instruments in Australia.
Regulators acknowledge the risks posed by cheap credit, but both the RBA and APRA argue low rates are in Australia’s interest to help offset falling resources investment. The RBA says household debt as a share of disposable income has fallen slightly over the past decade, and most analysts in the article think it’s too early to call a bubble. Still, investors should monitor lending standards and credit growth.
The RBA’s Malcolm Edey said that over the last 10 years house prices have risen at a rate equivalent to, or on average less than, growth in household incomes. He acknowledged there were periods when prices rose faster than incomes, but argued that does not automatically mean a bubble.
Views are mixed but cautious. SQM Research forecasted Sydney home prices could surge 15–20% in 2014 on top of 9–12% growth this year, while many analysts and investment managers quoted in the article — including Dion Hershan at Goldman Sachs Asset Management — say it’s still ‘way too early’ to call a housing boom or bubble.
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