Major bank economist warns of housing bubble risk

by Julia Corderoy27 Nov 2014
With the Reserve Bank almost unequivocally tipped to keep the cash rate on hold at 2.5% next week, a major bank economist has said that while we are not currently in a housing bubble, there is “certainly a risk” that we could be heading that way.

Warren Hogan, chief economist at ANZ said a housing bubble has to be characterised by a broad based increase in house prices and unsustainable speculative behaviour – which is not happening at the moment.

“There are some excesses forming around the Sydney market that has a very historically high level of investor activity, but this is not a broad based bubble. Outside of Sydney and Melbourne, house price gains are lethargic; we’re talking 3, 4 or 5 percent for the other capital cities and the amount of leverage in the market outside of Sydney and Melbourne is quite modest,” he said in a discussion with ANZ’s BlueNotes.

However, Hogan says there is a risk that we are setting ourselves up to move into bubble territory.

“The issue is that we have the platform to form a bubble in the next few years. We’ve seen a significant increase in prices in Sydney and in Melbourne over a number of years and there is some momentum outside of those major cities and that means that expectations for capital appreciation are starting to form,” he said.

“What we want to watch and where we think can become a real problem is when we get a broader element of the community getting involved in investment property that is on a short term speculative view.”

Hogan says the Reserve Bank will be reluctant to move interest rates anytime soon while the economy is still in this early stage of the non-mining recovery, however he believes it in the best interests of the bank to make an upwards move next year.

“I think they would like to see interest rates a little bit higher because these low interest rates, by Australian standards anyway, are creating some risks in the housing market – not right now, but potentially down the track. 

“We think that in the middle of 2015, maybe in the second half, the Reserve Bank may take the opportunity to raise interest rates 50 or 100 basis points – if the world economy is looking better, if we’re seeing some traction in the non-mining economy and if we’re seeing the labour market stable.”

 

COMMENTS

  • by GC 27/11/2014 9:03:29 AM

    Can we please play another record?
    This one is worn out - have been hearing the same thing for over 10 years.