"Medium-term risk" of Australia reaching housing “bubble territory”: David Bassanese

There is "medium-term risk" of house prices rising too fast and Australia entering housing "bubble territory", says The Australian Financial Review’s economic commentator David Bassanese.

Bassanese expects the RBA to have a “fairly easy” decision to make about leaving the cash rate on hold at 2.75% when it meets tomorrow, but beyond that the path is uncertain.

He says the RBA would want a “reasonable lift” in established house prices as part of a recovery in non-mining sectors of the economy but would not want house prices to rise “too far or too fast” – the reason it is likely to be cautious about cutting rates “anytime soon”.

He still maintains the belief that there is one more 25 basis point rate cut on the cards.

He expects house prices to rise by around 10% to 15% over the course of the RBA’s easing cycle, peaking around mid-2014 and says the recent improvements in home sales rates in NSW suggests house prices are moving in the right direction.

“Having been flat for several years, they are not yet in danger of reaching bubble territory – though that remains a medium-term risk,” he says.

Since November 2011 the RBA has cut the cash rate by 200 basis points from 4.75% to 2.75%.

As noted by AMP Capital chief economist Shane Oliver in May, house prices had risen just 1.9% a year-and-a-half into the easing cycle since November 2011 compared with an 11% gain in the last easing cycle, which commenced in September 2008.

RP Data- Rismark will today report around a 1% correction in house prices following a 0.5% decline in April.

Twenty four out of twenty five economists polled by Bloomberg expect the RBA to leave the cash rate on hold in June when it meets on Tuesday.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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