March 21, 2017

Reserve Bank concerned on highly indebted households, real estate bubble

The Reserve Bank's warnings about the risks of a potential real estate bubble in Sydney and Melbourne are getting louder.

The March minutes released today underscored the Reserve Bank's concern about how highly indebted households would deal with a shock from a combination of rising unemployment and falling consumption.

In its most recent meeting a fortnight ago when the board kept rates on hold, the RBA did not appear to see an end to accelerating real estate investment in Australia's major east coast cites.

The RBA warned that recent data continued to "suggest that there had been a build up of risks associated with the housing market".

"Even though building approvals had fallen significantly in recent months, the substantial amount of work in the pipeline suggested that dwelling investment would continue."

The RBA said the continuing strength in real estate investment remained concentrated in New South Wales after dwelling investment rebounded in the December quarter.

"Conditions appeared to have strengthened in Sydney and remained strong in Melbourne," the minutes said.

"These cities had continued to record brisk growth in housing prices and auction clearance rates had remained high."

Capital Economics chief economist for Australia, Paul Dales, said the two cuts in interest rates by the RBA last year led to a surge in household borrowing.

"The acceleration in house price inflation in the fourth quarter of last year has undoubtedly continued into the start of this year and will remain a thorn in the side of the Reserve Bank of Australia for a while yet," he said.

'Little doubt' of bubble in Sydney, Melbourne

The Reserve Bank's warning about the risks came after ASIC chairman Greg Medcraft said there was little doubt that a real estate bubble existed in Sydney and Melbourne.

ABS data released today shows home prices have risen 4.1 per cent in the fourth quarter. Sydney prices have surged 10.3 per cent year-on-year, while Melbourne jumped 10.8 per cent.

"Borrowing for housing by investors had picked up over recent months and growth in household debt had been faster than that in household income," the minutes said.

However, the Reserve Bank made the point that the housing risks were centred on the east coast while growth in other parts of the country was sluggish.

"In contrast, housing prices and rents had fallen in Perth for two years or so and apartment prices had declined in Brisbane."

Despite better than expected economic growth in the December quarter, the Reserve Bank pointed to weak wages growth with household savings continuing to decline.

"Members noted that over the past two decades movements in the Australian household saving ratio have been much larger than those in similar economies," the minutes said.

Last week, RBA assistant governor Michelle Bullock warned that an acceleration in investor growth could pose a risk to the financial system in the event of a downturn or a global shock.

The RBA was also concerned that labour market conditions "remain mixed" and that employment was "not quite as strong" as the headline figures indicated.

The rising Australian dollar remained a concern and the RBA believed "an appreciating currency would complicate the adjustment of the economy" as the mining investment boom fades.

The Australian dollar has been sitting around 77 US cents after the US Federal Reserve signalled a more cautious path to future rate rises.

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