Further inflating housing market “unwise”: RBA’s Glenn Stevens

Further inflating housing market "unwise": RBA's Glenn Stevens

Reserve Bank of Australia chief Glenn Stevens has acknowledged the “elevated level of housing prices”, as record low interest rates continue for another month.

In a speech made in Adelaide on Wednesday, Stevens noted the prospect of fostering excessive risk-taking behaviour in the financial sector, warning that if people over-commit themselves financially, the economy could be vulnerable to “nasty shocks”.

“It is stating the obvious that at present, while we may desire to see a faster reduction in the rate of unemployment, further inflating an already elevated level of housing prices seems an unwise route to try to achieve that,” said Stevens.

According to RP Data, home prices in Australia’s capital cities rose by 4.2% in the quarter to August, the highest winter price gain since 2007. The growth was largely driven by Sydney and Melbourne, where median dwelling prices rose by 5.0% and 6.4% respectively.

Unemployment sits at a 12 year high of 6.4%.

Economists from Australia’s major lenders have declared that there is no housing market bubble, others, including AMP Capital chief economist Shane Oliver, also consider Australian housing expensive on a long-term basis.

Oliver said that the low interest rate climate has been a major factor in recent property growth, and there is potential for interest rates to encourage people to take on an imprudent level of risk.

“There’s no doubt that low interest rates are driving the upswing in property prices,” said Oliver. “When interest rates are cut, one of the ways that helps the economy is that it forces investors to take their money out of low risk investments like bank deposits, and move it to higher risk investments like housing and shares.”

However, Oliver maintained that Australian’s level of financial risk is “not excessive in aggregate”.

“The rate of growth in credits in Australia is still quite modest, by the standards of the past,” he said, noting the Reserve Bank’s credit statistics for July. Overall credit grew by 5.1% in the year to July, with 6.5% growth in housing credit.

“At a 6.5% year on year rate, it’s much lower than the 20% plus growth we saw a decade ago,” said Oliver.

The Reserve Bank has maintained a record low overnight cash rate of 2.5% since August 2013, a policy Stevens said “could perhaps be described as boring”.

“If so, I would regard that as a small success,” said Stevens, who highlighted the “stability and predictability” of the current interest rate structure.

This article originally appeared on Property Observer.

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