RBA concerned about rising house prices

by Julia Corderoy14 Aug 2015
Rising house prices are creating risks in our economy, according to the Reserve Bank of Australia, because our sluggish wage growth is not keeping up.

In an address to the 54th Shann Memorial Lecture in Perth, deputy governor of the RBA Philip Lowe said Australia is “unlikely” to be better off despite the strength of our property market.

“The first is that rising land and housing prices have made many, but not all, Australians better off. They have also changed the distribution of wealth within our society and between generations,” he said.

“And we are still coming to grips with the implications of this. Ever-rising housing prices, relative to our incomes, do increase risks in the economy and are unlikely to make us better off as a nation. Rising housing prices are best matched by rising incomes.”

According to RBA’s research, when house prices rise so too does expectations of future income – or there is less income uncertainty – thus increasing spending and confidence in the economy. However, Lowe says that with historically low wage growth, rising house prices are not having the effect they used to and is, in fact, creating risks in the Australian economy.

“In the early 2000s, when housing prices and real incomes were rising quickly, many households used the higher value of their housing assets to increase their spending,” he said in his address.

“Nowadays, this is not happening on the same scale that it once was. With slower expected future income growth and increased concerns about future housing costs, the response to higher housing prices looks to be smaller than it was previously. And this smaller response is affecting overall spending in the economy.”

According to the RBA’s most recent statement of monetary policy, the Wage Price Index increased by 0.5% in the March quarter and by 2.3% over the year – the lowest annual pace since the index was first published in the late 1990s. Other wage measures, such as average earnings per hour, also suggest that the recent period has been the most protracted episode of low wage growth since the early 1990s.