Property bubble risks talked down by experts

A senior Reserve Bank official has labeled talks of an Australian housing bubble as “unrealistic alarmism” amid growing concerns that low mortgage rates were artificially inflating property prices.

RBA assistant governor for financial stability, Malcolm Edey, told the Financial Services Institute of Australasia annual conference in Sydney this week that demand for housing is strengthening, but warns it is important to keep this growth in perspective.

"We shouldn't be rushing to reach for the bubble terminology every time the rate in house price increases is higher than average, because by definition that's 50 per cent of the time and you’re just going to be unrealistically alarmist by making that call every time that happens,” Edey said.

"And you're just going to be unrealistically alarmist by making that call every time that happens."

He explained that house prices over the last decade had risen at a slower pace than household incomes, but within that trend, there have also been cycles.

At the same time, the growth rate of property prices has also gone through a cycle.

“[There are] periods when the rates of increase in house price have been higher than average and periods when it’s been lower than average, we’re in one of the higher than average periods at the moment,” he said.

Edey has attributed the pent-up demand to the current low interest rate environment that is stimulating spending and borrowing.

"We are seeing that influence working at the moment in the housing sector, and that is not surprising because it is an interest rate-sensitive sector," he said.

Senior Property Economist at MacroPlan Dimasi, Martin Bregozzo, has also talked down the risk of a property bubble in Australia. He told Property Observer that investors just need to look to the returning of confidence to the housing market and a recovery to median property prices in capital cities from June/July this year.

Bregozzo believes the demand is also driven by families looking to upgrade.

“Those people are looking to lock in the extra space, like an addition bedroom while they can, while interest rates are low,” he said.

“If there’s the potential of the market picking up, then effectively, you’re building equity over that time.”

Asked about the signs of an emerging property bubble, Mr Bregozzo said the economy would be “absolutely steaming ahead” and be “awash with money”.

“The RBA will step in, and you’ll have a rising interest rate environment, a lot job security, and there’ll be so much confidence out there that it will almost be bordering on hubris,” he said.

Mr Bregozzo said Australia’s housing shortage is also expected to absorb much of the stock and act as a potential check and balance in the housing sector.