Glenn Stevens admits Sydney house prices 'give me some discomfort'

Reserve Bank governor Glenn Stevens has conceded that he has "some discomfort' about rising Sydney house prices, but argued that these concerns need to be weighed up against the need to stimulate economic activity.

And he also pointed out that Australia had a new "two speed" economy, with strong growth in states such as NSW, while resource-rich states, such as Western Australia and Queensland, had seen growth rates slump as the mining boom had ended.

In an interview with The Australian Financial Review, Mr Stevens pointed out that there were some mixed evidence as to the strength of the housing market.

Although real estate auction clearance rates are high, the number of houses being put up for auction had fallen, and lending for housing had slowed.

"Prices are probably rising smartly in some areas, but in other areas they're not, and in some cities in the country, they're falling," he said, in what is the clearest acknowledgement to date that the central bank is concerned about outsized price rises in some sectors of the market.

"So I think it's a mixed picture. It's not without risk, and it certainly gives me some discomfort, but then we're balancing that against the other obligations we have to pursue."

Striking a balance The task for the Reserve Bank, he said, was "to balance all these things and make a decision that neither completely ignores the financial stability and housing concerns, nor let them completely dictate the decision.

"That's the balance that we've tried to strike".

Stevens argued that very low interest rates had stimulated borrowing for housing, which boosted domestic demand.

"Most of the domestic effects of cheap money comes through the household sector. Higher house prices than otherwise, more borrowing than otherwise, wealth effects, lower saving rate, etc."

But he added, "the thing that I've tried to grapple with is ?that's where we get the effects, but do we actually want households to engage in a major levering-up from here?

"It's not that what they did before was disastrous ?that clearly hasn't been. But from here, how much more do you want?"

Two-speed story

He said the Reserve Bank remained confident there was little evidence of a widespread bubble in house prices.

"As the facts at the moment are, the credit growth of households is running about 6 per cent. Fractionally less if you take account of a build-up in mortgage offsets and so on".

He added, "I don't think you can say this is a terrible risk. If it was 10 per cent or 15 per cent ?that would be a different story".

Mr Stevens noted that although housing prices were volatile, and moved around from month to month, but over the year, on a nationwide basis, the rise in house prices has been "positive, but it's not unusually strong and it's actually negative in some cities".

He added that there was evidence of "a two-speed economy story" in the latest housing price movements.

"It's probably not that surprising that parts of Sydney are leading the charge, because this economy is leading the country at the present time."

This, he added, is something "which, actually, we needed if we're to manage the transition after the mining boom".

Sep 9 2016 / Sydney Morning Herald

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