Reserve Bank governor Glenn Stevens has played down concerns of house prices crashing but has indicated the RBA would act if prices started rising by 10% to 20% per year alongside rising household debt levels.
He urged Australians to be more comfortable with more modest increases in house prices, describing double-digit house price growth as both “puzzling and “troubling”.
He also suggested the RBA would be comfortable with the cash rate falling below 3%, adding that there was no “particularly clear evidence” that monetary policy is failing to work, as part of an interview with the Australian Financial Review.
“We’ve seen some pick-up in housing prices, as you’d expect with interest rates coming down, but I don’t think we’re seeing at the moment a dangerous leveraging up there by households,” he said.
Stevens said his position was that house prices in Australia were high, but when comparing to a range of other countries, not just the US, it was “actually a lot harder to make the case that they’re grossly overpriced and due for a crash”.
“After all, we’ve been around this level of house prices/income for 10 years – [it’s] taking a long time to burst if it is a bubble.
“So I’m not so much concerned about a crash, but as I have said also before, it’s seems to me we would be flirting with danger were we to see a very big run-up from these present levels,” he said.
Stevens said the RBA was comfortable with “gentle reversal” of the 10 or 15% decline that has already occurred” noting that there had been “some gain in house prices over the past year”.
But he said it would “troubling” if there were a return to “very strong 10 to 20% per year persistent rates of growth of housing prices, especially if that was accompanied by a return of rising leverage”.
“I think that would be a very dangerous thing to do, and we would be imprudent in the extreme to preside over that,” he said.
He tempered these remarks by saying that he did not expect such a scenario to unfold.
In the interview he also acknowledged that the drop in house prices had impact on the residential construction sector, dampening the confidence of builders and their lenders because “nobody wants to build an asset whose price is going down as you build it”.
He said the seeming end of the downturn in prices would be helpful in getting some more construction going, but added that being comfortable with modest house price growth was also important in a recovery for this sector.
He also noted that he had expected the housing construction sector to pick up earlier than expected, but said “there are some signs of that looking like it’s about to go up now”.
On the issue of interest rates, Stevens said that a cash rate of 3% was not an emergency setting as was the case four years ago, but that the low rate had been “calibrated” for the current circumstances.
He said there was no “particular totemic significance” to be attached to the cash rate going below 3% per cent “if it needed to do that”.
Economists are tipping a cash rate below 3% in 2013, with ANZ expecting four more rate cuts to an unprecedented rate of 2%.
Stevens acknowledged that interest rate futures markets were pricing in further cuts but said the RBA would “have a look in the New Year and see how things look”.
“But I think we have to recognise that we are in a very unusual world internationally. It is a very important conditioning factor that the rate of interest out of the global money centres is nil.
“A 3% rate for us, which is very low by historical standards, is, by global standards, pretty attractive for others.”
He added that it needed to be accepted that the international situation has impacted on where the RBA sets its cash rate.
“But whether or not we need to go lower, we’ll see how that turns out in the new year.”