Modest risk of mini-bubble in house prices, but gains likely to be in line with household income: David Bassanese

Economic commentator David Bassanese says the Reserve Bank of Australia policies will likely push up property prices, possibly into a "mini-bubble" but not into any sort of major boom. 

“Although the RBA naturally does not want to see a speculative bubble develop, it probably concedes that further nearer-term house price gains will help the economy’s transition – by improving household wealth and consumer spending propensity and making it more profitable for developers to build new homes,” Bassanese wrote in the Australian Financial Review.

“That said, further strong house price gains are not assured. Unlike in 2009-10, for example, one major headwind in the coming year should be higher unemployment. After all, the key reason interest rates are so low is because the economy is growing at a below-trend pace, and even the Rudd government recently conceded in its pre-election economic statement that the unemployment rate was likely to rise from 5.7% to 6.25% by June 2014.

Bassanese says the property market is strengthening with clearance rates up in Sydney and Melbourne up as well as increased lending to investors.

He says despite recent house price gains the trend will continue, driven by cheap home loans.

“Despite concerns about high Australian house prices, it may surprise some to know that the share of household disposable income required to meet monthly mortgage repayments on an average-priced Australian home is lower than its 20-year average,” he wrote.

“That’s because interest rates are very low and house prices – at least over the past decade – have only broadly matched growth in household income.”

He says recent RBA statements suggest a leaning towards another rate cut which presents the risk of a mini bubble.

“There’s a modest risk that a mini-bubble in house prices could reappear if the RBA keeps interest rates low enough for long enough to support the economy.”

“With mining investment turning down and prospects for non-mining business investment – such as office construction – still quite subdued, the RBA is counting on a decent upturn in the housing sector to keep the economy afloat over the next year or so.”

But he says if house prices do rise it’s more in the nature of a cyclical trend rather than any sort of boom.

“Doomsayers will warn of a property bust as and when prices edge lower, and spruikers will talk of a new boom whenever prices rise. But the reality is that house prices are likely to continue to move broadly in line with household income (that is, 3 to 4 per cent a year), albeit with modest cycles around this trend in line with cyclical shifts in interest rates and unemployment.”