RBA governor Glenn Stevens has played down concerns over house prices crashing, but has indicated the RBA would act if prices started rising by 10% to 20% per year alongside rising household debt levels.
In a recent Property Observer article, Stevens urges Australians to be content with more modest increases in house prices, describing double-digit house price growth as both “puzzling and “troubling”.
He also suggests the RBA would be comfortable with the cash rate falling below 3%, as part of an interview with the Australian Financial Review.
“We’ve seen some pick-up in housing prices, as you’d expect with interest rates coming down, but I don’t think we’re seeing at the moment a dangerous leveraging up there by households.”
Stevens says house prices in Australia are high, but when compared to a range of other countries - not just the US - he says it’s a lot harder to make the case that they’re “grossly overpriced” and due for a crash.
“After all, we’ve been around this level of house prices/income for 10 years – [it’s] taking a long time to burst if it is a bubble. So I’m not so much concerned about a crash, but as I have said also before, it’s seems to me we would be flirting with danger were we to see a very big run-up from these present levels.”
Stevens says the RBA is comfortable with “gentle reversal” of the 10 or 15% decline that has already occurred, noting that there had been some gain in house prices over the past year.
However, he says it would “troubling” if there were a return to 10 to 20% per year persistent rates of growth of housing prices, particularly if that were accompanied by a return of rising leverage.
"I think that would be a very dangerous thing to do, and we would be imprudent in the extreme to preside over that."
Stevens said that, on the subject of interest rates, a cash rate of 3% was not an emergency setting as was the case four years ago, but that the low rate had been “calibrated” for the current circumstances.
Economists are tipping a cash rate below 3% in 2013, with ANZ and Westpac expecting four more rate cuts to an unprecedented rate of 2%.
Stevens added that it needed to be accepted that the international situation has an impact on where the RBA sets its cash rate.
“But whether or not we need to go lower, we’ll see how that turns out in the New Year.”