With recovery on track, RBA boss sees no bubble bubble toil and trouble
The Reserve Bank governor believes ultra-low interest rates won’t end in tears for homeowners, investors and lenders
Yet on Wednesday at the National Press Club, the Reserve Bank governor played down the prospect of a messy boom in housing prices or shares as the economic recovery from the COVID-19 shock gathers momentum.
“Am I worried about asset prices rising too quickly?” he said in answer to a reporter’s question. “At the moment, not especially … I find it hard at the moment to express concerns about the developments in asset prices to date.”
According to CoreLogic, average capital city house prices rose by 1.7 per cent in the year to December, while in regional areas prices increased by 7.9 per cent over the period.
A year ago at the same venue, before the coronavirus, Lowe actually said falling home prices were one of the factors behind sluggish growth in 2019.
He says property dynamics are now in a different phase.
Still, with the usual cascade of caveats of a prudential, nay prudent, regulator, the central bank chief took a benign view of froth in the housing market.
Why? He pointed to the shrinkage in the size of the overall economy, because of the expected slump in population growth this year to a minuscule 0.2 per cent, the lowest rate since World War I.
Sure, the pandemic’s great internal migration out of capital cities, especially Sydney and Melbourne, had put a flame under regional home values, but Lowe said the nation’s house prices across the board were where they were four years ago. “The capital city price index is lower than it was four years ago,” he added.
“And the equity market — we aren’t even back to where we were at the beginning of last year.”
At ease, bubble worriers.
Lowe said “with a high degree of confidence” the central bank’s board did not expect official interest rates, now an ultra-low 0.1 per cent, to rise until 2024, after his seven-year term ends in September 2023. He may reject that idea as a “pledge” but it would mean presiding over no rate rises during his entire stewardship. In Canberra parlance, Lowe may not be a “lifter” but in US Fed-speak he’s a “leaner” against the economic winds of low inflation, wage stagnation and unemployment.
Looking at lending figures for housing, there’s been a huge recent jump for owner-occupied dwelling and construction of new homes and renovations, aided by super-cheap mortgage rates, government housing subsidies and a spurt in household incomes.
In December, the number of residential building approvals rose by almost 11 per cent, an “incredible” lift according to bank economists.
Approvals for detached houses were up by 55 per cent in the year. Yet property investors remain cautious, and approvals for the construction of offices, shops, factories and health facilities are subdued because of the prevalence of work from home and the halt to Big Australia.
The main worry in housing for Lowe was if lending standards deteriorated.
But then, like before, the Australian Prudential Regulation Authority would hold the feet of bank CEOs to the asset-price blaze. In 2002 when he was at the Bank for International Settlements, Lowe wrote a paper with Claudio Borio warning that low interest rates could cause a surge in lending and a spike in asset prices that might need to be snuffed out by monetary policy.
Lowe told the NPC it remained to be seen how long the recovery in housing prices would continue “but sustainable increases in asset prices support household balance sheets and encourage spending through positive wealth effects. “Higher housing prices can also encourage additional residential construction. But as housing prices rise again, we will be monitoring lending standards closely. We would be concerned if there were to be a deterioration in these standards, but there are few signs of this at the moment,” he said.
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Philip Lowe made his reputation among the global econorati in a prescient research paper almost two decades ago on the dangers of asset-price bubbles because of loose monetary policy.