Bubble concerns “unrealistically alarmist”: RBA

The Reserve Bank of Australia says describing the Australian property market as a bubble is “unrealistically alarmist”.

Assistant governor of the RBA, Malcolm Edey, says while house prices are increasing it’s part of a normal cycle of price growth and decline.

“Demand for housing is strengthening at the moment there’s no doubt about that but it’s important to keep this things in perspective,” Edey told Financial Services Conference in Sydney yesterday.

“Looking back over the last 10 years or so house prices have risen at a rate similar to or on average less than the growth of household incomes so the ratio of house prices to incomes over that period has been roughly flat or most of the time tending actually to fall.

“Within that trend however inevitably there will be cycles and there have been periods where that ratio has been rising and periods where it has been falling, or to put it another way periods when the rate of increase in house prices have been higher than average and periods when it’s been lower than average.”

He acknowledged that house prices are increasing faster than average right now but said this doesn’t constitute of bubble.

“We shouldn’t be rushing to reach for the bubble terminology every time the rate of increase in house prices is higher than average because by definition that’s 50% of the time and you’re just going to be unrealistically alarmist by making that call every time that happens,” he said.

He clarified the wording of the RBA’s minutes released on Tuesday.

“This is an area to watch but we do need to keep it in the sort of perspective that I’ve just been talking about.”

Meanwhile 1300HomeLoan boss John Kolenda has called for the RBA not to increase rates.

“We would not like to see any knee jerk reaction from the RBA should economic conditions continue to improve," he said.

He said the RBA lifted rates too high and too fast during 2009 and 2010 after lowering them in response to the global financial crisis.

“That caused a lot of damage to businesses and consumers with the RBA since then making eight rate cuts to try and make amends and stimulate activity,” he said.

 “Borrowers remain particularly vulnerable to the impact of a rate increase while they continue to deal with significant rises in the cost of living and all the other concerns surrounding the economy.”