Stevens is stuck between a frenzy and a hard place

A jump in inner Sydney's apartment market points to a broader dilemma the Reserve Bank faces: hold or lift rates and cause a spike in the dollar, or lower them and trigger a housing bubble.

One of the key bellwethers of the Australian dwelling  market, inner Sydney apartments, has turned dramatically. This big change has implications for Australian interest rates.

Suddenly, local buyers who have been dormant in the market are now clambering to buy because they think there is a profit to be made.

In less than three months the market price of a bottom of the range Meriton inner-Sydney apartment has risen 6 per cent from about $500,000 to around $530,000.

The Chinese, who were dominating the inner-city apartment market are still important buyers, but much less so than before. According to Meriton’s Harry Triguboff, local buyers have jumped from 15 to 40 per cent of the market.

What is happening in inner Sydney apartments underlines what Stephen Koukoulas concluded last week: that the days of interest rate reductions are coming to a close because what is happening in inner Sydney is being duplicated to a lesser degree in many other dwelling markets (Architects of a housing fortune, March 27).

Another rate reduction is unlikely today but remains on the Reserve Bank agenda. However, there is a danger that a rate cut may cause the enthusiastic profit-linked buying to become frenzied.

With the benefit of hindsight, it’s now clear that the Reserve Bank should have reduced rates much more quickly when it had the chance. By keeping official rates too high for too long, it boosted the Australian dollar. Now if speculation of steady to higher rates lifts the dollar further, Reserve Bank Governor Glenn Stevens will have to choose between an even higher dollar or the danger rampant housing speculation.

Given the long-term inflationary effects of an inner-city apartment frenzy he will probably choose the higher dollar.