Think Big: Here’s why the RBA isn’t worried about the housing rally turning into a bubble
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As recently as last August, analyst were assessing the fallout as Australian house prices fell for the third straight month while the economy ground to a halt.
But six months is a long time in a post-Covid world. January marked the fourth straight month that house prices rose nationally, and a few factors have converged to put some tailwinds behind the market.
Lending approvals are surging higher, as are the number of approvals to build new houses.
The main driver is interest rates, and the RBA this week said it now doesn’t expect to lift them until 2024.
Housing is Australia’s largest asset class and Aussie household debt ratios have consistently ranked among the highest globally in recent years.
So when property prices get on the move it usually raises a bit of ‘bubble’ chatter, but for now policy makers appear pretty relaxed about the whole thing.
Some observers have raised the prospect that another round of macro-prudential measures will be introduced if the market gets too hot.
Over the past decade or so, when policymakers got edgy about excessive housing debt, it had more to do with the investor side.
‘Macro-pru’ measures were rolled out with considerable effect 2014 and 2017, as bank regulator APRA tapped the brakes on investor lending in the major east coast markets.
So far, a feature of the post-Covid rally is that activity is heavily leaning towards owner-occupiers, rather than housing investors.
Loan approvals to owner-occupiers surged by 31.2 per cent annually in December.
Loans to investors also picked up, but y/y growth was comparatively lower at 10.9 per cent.
Assessing the market more broadly, RBA governor Phillip Lowe doesn’t see credit risk as a threat.
“As housing prices rise again, we will be monitoring lending standards closely,” he said earlier this week.
“We would be concerned if there were to be a deterioration in these standards, but there are few signs of this at the moment.”
There are also some other housing factors unique to a post-Covid economy, most notably population growth (or lack thereof).
Since 2011, Australia’s working-age population growth doubled that of the US and UK, as policymakers committed to a strong migrant intake.
Most of those migrants flowed to the major east coast capitals in Sydney and Melbourne — one of the factors which underpinned the stark outperformance of those two housing markets compared to other states over the past 10 years.
Since the pandemic, immigration has come to a screaming halt. And Lowe himself doesn’t seem convinced the housing market is poised for another barnstorming rally.
While acknowledging that prices are “rising across most of the country…it remains to be seen how long this will continue”, Lowe said.
He added that “sustainable increases in asset prices support household balance sheets and encourage spending through positive wealth effects”.
So for now, the RBA is happy for rising home values to act as another positive growth indicator assisting the post-Covid recovery, along with improvements in the labour market and consumer confidence levels sitting at 10-year highs.