The Reserve Bank’s four prevailing views on the property market: Glenn Stevens
At today’s Econometric Society Australasian Meeting and the Australian Conference of Economists in Hobart, Reserve Bank of Australia governor Glenn Stevens discussed four consistent views that they have held on the property market.
Noting that the question of housing prices is one that sharply divides opinion – as few other issues do – he said that “Some use the ‘B’ word, sometimes followed by calls for interest rates to be higher. Others regard it as unthinkable that interest rates would ever respond to housing prices.”
Meanwhile, there is also a school of thought that there should be regulatory action to constrain housing lending, said Stevens, though he noted that it has remained moderate so far.
Instead, he noted these four points:
- With dwelling prices having fallen between 2010 and 2012, some recovery was not in itself particularly cause for concern, certainly not initially. Moreover, if we think there is a need for higher construction, which we do, an environment of declining prices is probably not conducive to that outcome.
Some pick-up in housing prices as a result of lower interest rates was to be expected; it shows that monetary policy is working and is part of the normal transmission process. Of course, this argument becomes less persuasive if valuations reach new highs and keep rising. - Were there to be a further big run-up in prices, with past increases leading to overconfident expectations of continuing gains, it would be a different matter.
If this were accompanied by a return to significant increases in household leverage, from already high levels, that would be a matter for concern. It would be adding risk to the system. - To date the amount of new borrowing does not appear, overall, to be imprudent. The rise in the value of loan approvals over the past year of around 20% is certainly significant.
It's important to note, however, that scaled by the amount of credit outstanding, the rate of this flow over recent months, while clearly well off its 2011 low point, is actually not that high compared with longer-run history (Graph 2). It's only a little above 2008 lows, in fact.
The growth of credit outstanding for housing is about 6% to 7% per annum, or slightly above trend nominal income growth. It's hard to mount the soap box to complain about that pace.
Source: ABS, RBA (presented at The Econometric Society Australasian Meeting and the Australian Conference of Economists). - Investors should take care in the Sydney market, which is the main area where a large increase in borrowing has been occurring.
The total value of credit approvals for investor loans in New South Wales as a whole is about 130% higher than in 2008, and it is in the investor segment where there has been evidence of some increase in lending with loan-to-value ratios above 80% in the past couple of quarters.
He noted that two messages endure through these points, the first is that prices do not always rise and so this should be factored in to deciding a financing structure. The second is that banks and other lenders need to maintain strong lending standard.
Read Property Observer tomorrow for more about Glenn Stevens’ speech.