Property investor 'animal spirits' needed in wider economy: RBA Governor Glenn Stevens

The Reserve Bank of Australia governor Glenn Stevens has said it should not be assumed that property investor activity is problematic. 

"Investment in new and existing dwellings is rising," he noted in an unusually insightful speech, titled '­Economics Possibilities', to the annual dinner the Committee for Economic Development of Australia.

"It ought to be possible, if we are being sensible both on the demand management side and the supply side, for this to go further yet and, more importantly, for the level of activity to stay high for longer than the average cyclical experience.

"A high level of construction, maintained for a longer period of time, is vastly preferable to a very sharp boom and bust cycle.

"That alternative outcome might give us a higher peak in the near term, but then a slump in the housing sector at a time when the fall in mining investment is still occurring.

"A sustained period of strong construction will be more helpful from the point of view of encouraging growth in non-mining activity – and also, surely, from a wider perspective: housing our growing population in an affordable manner."

Stevens said it was "not clear whether price increases will continue or abate.

"Furthermore, it is not to be assumed that investor activity is problematic, per se.

"A proportion of the investor transactions are financing additions to the stock of dwellings, which is helpful.

"It can also be observed that a bit more of the ‘animal spirits’ evident in the housing market would be welcome in some other sectors of the economy," he said.

Offering a few observations on the topic of house prices, Glenn Stevens noted having fallen in late 2010 and 2011, dwelling prices have since risen, with the median price across the country up by around $100 000 – about 18% – since the low point.

The Reserve Bank Governor Glenn Stevens noted the RBA does not take a doctrinaire view of the ‘correct’ level of house prices.

"Prices have risen in all capitals, with a fair degree of variation: the smallest increase has been in Canberra, at about 6%, and the largest in Sydney, at 28%."

Credit outstanding to households in total is rising at about 6–7% per year.

"I see no particular concern with that.

"When we turn to the rate of growth of credit to investors in particular, we see that it has picked up to about 10% per annum over the past six months, with investors accounting for almost half of the flow of new credit.

"It is not clear whether this acceleration will continue or abate."

It was not the first time he had used the phrase, but the first time in relation to property sentiment.

In August he told a Parliamentary committee the RBA would like to see companies spending money, hiring more workers and investing in new plant rather than increasing dividends and repricing existing assets.

"The thing that is most needed now is something monetary policy can't directly cause: more of the sort of 'animal spirits' needed to support an expansion of the stock of existing assets (outside the mining sector), not just a re-pricing of existing assets," he said.

Property Observer assumes "animal spirits" references the term John Maynard Keynes used in his 1936 book The General Theory of Employment, Interest and Money to describe the instincts, proclivities and emotions that ostensibly influence and guide human behavior, and which can be measured in terms of, for example, consumer confidence.

The original passage by Keynes reads: "Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."