The saying goes that if you predict a market collapse once a week, you’ll eventually be right.
I’m sensing this syndrome right now: we’re hearing a lot of commentators such as American property analyst, Harry Dent, calling the Australian property market a ‘bubble’. Local economists have also criticised the Reserve Bank of Australia who they say have used low interest rates to create an overheated housing market.
But I’m siding with the Reserve Bank. Our central bank has targeted the housing market as a way of triggering economic growth, given that growth is below-trend: the three non-trade components of Gross Domestic Product – business investment, government expenditure, household consumption – are all down. So using low interest rates to boost the housing market is a good way to prompt economic activity.
This is what the Reserve Bank said in its latest statement: “[the] effect of lower interest rates on housing prices is an important channel through which expansionary monetary policy supports economic activity.”
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Economic activity translates to Australians using low interest rates to buy and renovate houses, and it’s been working. House prices rose by 10% last year.
But what could transform this housing stimulus approach into a bubble?
Too much supply could be a threat, but there is no oversupply. House prices rose 10% in one year – demand is running ahead of supply.
Perhaps imprudent lending might create a bubble? This is highly unlikely. Australia’s lending criteria is as tight now as in the depths of the GFC, and we’re not racing to take out loans. This is what the RBA says: ‘The upswing in housing asset values to date has not been fuelled by a rapid expansion in borrowing. Growth in housing credit is gradually picking up but remains relatively moderate…’
What about an over-valued property market? The figures on the Australian property market often refer to Sydney, which recorded property price growth of 14.5% in 2013. But look further and see that Canberra, Darwin, Adelaide and Hobart all recorded growth less than 5.0%. Affordability is good for most Australians but as always, there are pockets of expensive property.
Would a bubble form if the market was dangerously imbalanced? Well, the retail banks control residential development and their policy for developers is to finance 50 – 60% of the project while demanding high levels of presale. The banks require a supply-demand balance, and the RBA knows this.
Let’s assume the RBA abandons its current policy and raises interest rates in 2014. The risks are obvious: you may depress inflation but you’d raise the value of the Australian dollar against the US, and you’d run the risk of dowsing the comeback in consumer confidence and trigger the housing correction that commentators are warning about. You might even push inflation too low.
The RBA’s plan is the best way forward right now. The cash rate is a good setting to keep inflation, the Aussie dollar and unemployment relatively low.
Mark Bouris is executive chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting and tax, and insurance.
You can contact Mark on Twitter.
This article first appeared on Property Observer.