After almost two-years of interest rate cuts, RBA governor Glen Stevens has signalled in a speech at Citi's fifth annual Australian and New Zealand investment conference that he won’t allow record-low borrowing costs to propel house prices beyond the reach of younger generations.
He says the median price of a dwelling in Australia has risen by about 8% over the past 18 months, reversing a previous decline. Overall, the net worth of Australians has increased by around 15%, or more than $800 billion, since the end of 2011.
“It is not yet clear to what extent, or when, these more favourable trends in ‘confidence’ will translate into intentions to spend, invest and employ. The pace of new dwelling construction is starting to respond to higher prices in the established property market, as we need it to. But at this stage, the available information suggests that broader investment intentions in the business community remain subdued.”
In the interim, he says, ‘some commentators’ have taken the view that the property market dynamics are worrying.
“My own view, thus far, has been that some rise in housing prices is part of the normal cyclical dynamic, that it improves the incentive to build and that a price rise reversing an earlier decline probably isn't something to complain about too quickly. Moreover, credit growth, at between 4% and 5% per annum to households and less than that for business, does not suggest that rising leverage is so far feeding the price rise. Hence it has been a little too early to signal great concern.”
However, he admits there are two potential issues at hand, namely that credit growth may pick up somewhat over the period ahead. This, he says, is an area to which the RBA will pay ‘close attention’.
“Secondly, while overall credit growth remains low at present, borrowing is increasing quite quickly in some pockets. Investor participation in housing in Sydney, in particular, is becoming noticeably stronger. Over the past year, the rate of finance approvals for this purpose has increased by 40%.”
Stevens says Australia has experienced higher rates of growth in the past and that it could simply be that we’re seeing some ‘catch-up’ from a delayed initial response to fundamentals favouring property investment.
“Nonetheless, as this activity continues, lenders and borrowers alike would be well advised to take due care. It is very important that strong lending standards remain in place and that decisions be based on sensible assumptions about future returns. That's what we need if we are to experience a long and sustainable expansion in housing investment that houses our growing population at acceptable cost and pays reasonable returns on the capital deployed. That's the sort of outcome we want, as part of the more balanced growth path for the economy we are seeking over the years ahead.”