RBA governor warns Australia could be headed for housing bubble

Australia should use the downturn as an opportunity to build more residential housing in order to avoid another pricing bubble, Reserve Bank of Australia governor Glenn Stevens warned yesterday.

Stevens, in a speech at the Anika Foundation Luncheon, was significantly more upbeat about the prospects of economic recovery, but said rising unemployment and low building prices should be used to fulfill property demand before another bubble emerges.

He also warned the RBA could raise interest rates before a peak in unemployment, and said a failure to build new dwellings will lead to a housing bubble, giving way to deflation in asset prices in the long-term.

“A very real challenge in the near-term is the following: how to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices. Given the circumstances – the economy moving to a position of less than full employment, with labour shortages lessening and reduced pressure on prices for raw material inputs – this ought to be the time when we can add to the dwelling stock without a major run-up in prices.”

“If we fail to do that – if all we end up with is higher prices and not many more dwellings – then it will be very disappointing, indeed quite disturbing. Not only would it confirm that there are serious supply-side impediments to producing one of the things that previous generations of Australians have taken for granted, namely affordable shelter, it would also pose elevated risks of problems of over-leverage and asset price deflation down the track.”

ANZ economist Riki Polygenis says the RBA is clearly concerned about the health of household balance sheets, which has been a “key reason” for the development of the sub-prime mortgage crisis.

“After all, the central bank has been very reluctant to address housing market imbalances in the past and has preferred to simply “lean into them”. But perhaps Stevens is signaling that this attitude might have changed, particularly if the broader economic outlook does not take an unexpected turn for the worse?”

Australian Property Monitors economist Matthew Bell says the governor’s comments are “spot on”, but says any housing bubble would take some time to develop and there is still enough time to act.

“I don’t think he is referring to an imminent bubble, as he gives qualifications about the supply of housing. The comments are basically saying that if we don’t take opportunities to build new properties, we will have that problem down the track of over-leveraging, which would ultimately result in a bubble.”

Housing Industry Association senior economist Harley Dale says housing prices are continuing to grow, but are still below the levels seen during the boom in the first half of the decade.

“Over what I consider the medium-term, over the next few years as opposed to the next 12 months, then if we don’t see a reasonable recovery in new home building then the shortfall of stick is going to widen, and that will put pressure on prices. I don’t think we’ve got a house price boom on our hands at the moment, but if we’re well into 2010 and we’re only getting a mild recovery in building, then we’re going to fall short of demand and see a bubble.”

Dale says those watching the market shouldn’t mistake any growth for a bubble, as housing prices should continue to rise by healthy amounts over the short- to medium-term.

“You do have demand factors that are very positive, the first home owner’s boost that’s running until the end of the year, and while interest rates may be on the rise in 2010 they will stay at low levels for some time. So those are ticks in the boxes for generating growth, but the flipside is that we’ve got rising unemployment and that’s going to be a constraining factor in what happens to home values.”

Stevens also took the opportunity to point out healthy features of the economy, and noted that consumer confidence has continued to rise.

“We cannot claim that Australia has avoided any downturn at all. It appears at this stage, however, that the downturn we are having may turn out not to be one of the more serious ones of the post-War era, in contrast to the experiences of so many other countries.”

“It is becoming more common for Australians to see the glass as half full rather than as half empty. Put another way, we can much more easily imagine upside risks to the outlook, to balance out the downside ones, than was the case six months ago.”