Reserve Bank warns on credit fuelled property bubble

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Reserve Bank Governor, Glenn Stevens, has warned Australians of the dangers of rising house prices, rising household debt and the ready availability of credit, at the expense of creating affordable housing. He has also warned that Australia must be prepared for the 'downs' as well as the 'ups' as it hitches its economy to China.

Addressing The Anika Foundation which supports research into adolescent depression and suicide, Stevens said the challenge in the near term was, "how to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices."

Stevens used his speech to warn Australian households that things would not return to how they were. "The rise in household leverage, the much lower rate of saving out of current income, and the rise in asset values we saw since the mid 1990s, are far more likely to have been features of a one-time adjustment, albeit a fairly drawn out one, than of a permanent trend," he said.

But he added that: "the risks associated with those trends going too far are apparent from events in other countries. These risks have been reasonably contained so far in Australia - but it would be prudent not to push our luck here."

Easy credit, coupled with a buoyant and sustained property bull market had compounded the level of household debt meaning households were highly leveraged, and dependent on asset prices to sustain their spending.

In effect there had been a credit fuelled property bubble which deflated to some degree with the onset of the world financial crises, but Stevens worries it could turn back the other way. His hope in mitigating the risk of this occurring again is a reduction in the appetite for lending amongst the world's banks.

"Major international banks will remain diminished in stature and balance sheet capability, and will be required to devote more capital to their strategies in the future. If global regulators have their way, the world will be characterised by less leverage, and scarcer and more expensive credit, than in the earlier period," he said. 

In an impassioned plea to policy makers, and perhaps the property and housing industry itself, Stevens called for the creation of more affordable housing stock under given the unique prevailing market conditions.

"Given the circumstances - the economy moving to a position of less than full employment, with labour shortages lessening and reduced pressure on prices for raw material inputs - this ought to be the time when we can add to the dwelling stock without a major run up in prices," he said.

Going further Stevens warned, in strong and certain language, that it would be a great loss to miss this opportunity to increase affordable living stock. "If we fail to do that - if all we end up with is higher prices and not many more dwellings - then it will be very disappointing, indeed quite disturbing."

Stevens also warned on the downside of our obsession with China. "The emergence of China (and other countries such as India) will continue, and will offer opportunities for Australia. Plenty of observers, the RBA among them, have been saying this for years," he said. "If commodity prices do stay at their current relatively high levels on the back of strong emerging world demand, the mineral extraction sector and all those parts of the Australian economy that service it and feel its flow on effects, will expand."

But: "if we are more integrated into China's expansion, we will be similarly more exposed to the consequences of whatever might go wrong in that country. So our understanding of how the Chinese economy works, and of what risks may be accumulating there, will need continual work."

The Reserve Bank Governor's speech text can be found in full on the Reserve Bank of Australia's website: www.rba.gov.au.

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