RBA downplays bubble fears

by Julia Corderoy10 Mar 2016
The deputy governor of the Reserve Bank of Australia has downplayed concerns of a house price bubble, saying the housing market is better balanced than it was six years ago.

Speaking at the Urban Development Institute of Australia (UDIA) National Congress 2016, deputy governor Philip Lowe addressed concerns about a supply and demand imbalance in the housing market causing a property price bubble.

Lowe – who spoke at the UDIA conference in 2010 – said the market appears “to be of better balance” between supply and demand than it was in 2010.

“Since then, population growth has slowed, and the rate of growth in the dwelling stock has increased so that it now once again exceeds that of the population. 

“Reflecting this increase, the share of GDP accounted for by the building of new dwellings has risen significantly and is now close to the various peaks reached over the past 50 years.”

Lowe admits there has been a large “run-up” in house prices in Sydney and Melbourne, but the increase in supply has helped to avoid any price bubble. In addition, increased housing construction has put downward pressure on rents. The CPI measure of rent inflation, according to Lowe, sat at 1.2% in 2015.

“Whether or not these trends are maintained remains to be seen, and so we continue to watch developments in the housing market very closely. However, the overall picture does appear to be one of a better balance between supply and demand than was the case in 2010,” Lowe said.

In the short-term Lowe said we can expect a further increase in residential construction although at a slower rate than took place last year – which is welcomed. 

“It is unlikely to be in our collective interest to have a further surge in the construction of new dwellings, as a share of the economy, then to be followed by what would surely be a larger and more prolonged decline later on. Overall, the recent data on building approvals suggest that we are on a reasonable path here,” he said.

It could be a challenge in the longer-term, however, to maintain continued growth in residential construction due to land supply issues.

“From a longer-term perspective, the challenge of providing an adequate supply of reasonably priced housing for an increasing population rests largely on the flexibility of land supply and, in particular, the supply of well-located land,” Lowe said.

“This is because high housing costs largely reflect high land prices, not high construction costs. Here, it is zoning regulations and the transportation infrastructure that can make a material difference. In both areas, progress has been made since 2010, but there is more to be done.”