Former RBA economist puts a value on our property bubble

PROERTY prices in Australia are some 30% more than they should be, leaving the country precariously placed in relation to the global economic outlook.

PROERTY prices in Australia are some 30% more than they should be, which is not only making it harder for buyers to enter the market but also leaves the country precariously placed in relation to the global economic outlook.

That is the view of Jeremy Lawson, a former economist for the Reserve Bank, who believes that we should be wary of a housing bubble despite the RBA's more cautious approach.

Mr Lawson, now the chief economist of British fund manager Standard Life, is of the opinion that house prices had been inflated by loose money policy and the RBA's reliance on low interest rates rather than macro-prudential tools to slow price growth.

The latter, of course, uses regulatory measures to build additional resilience into financial systems during times of plenty so they are better able to hold their own during times of crisis.

Mr Lawson was particularly concerned that although the RBA was untroubled by an annual housing credit growth of 6%, it was twice that of wages growth and pushed household debt-to-income ratio to more than 150% - the levels seen just before the global financial crisis.

"A high debt-to-income ratio leaves households much more vulnerable to income and interest rate shocks," Mr Lawson told the Financial Review.

House prices have picked up pace in the past three months especially, with Melbourne rollicking past Sydney, and the capital cities on a whole almost 10% dearer this year.

That is unfortunate news for first-home buyers who are also now being told by lenders that they require a bigger deposit to ensure their purchase.

Where banks and mortgage companies would offer access to loans up to 105% and 100% of the value of the property, borrowers are finding that is no longer the case.

A number of financial institutions including Bendigo Bank and ANZ are capping their loans at 90% with Westpac and CUA opting for 95%,meaning buyers have to find a larger deposit or settle for a smaller cheaper property.

- APN Newsdesk