RBA governor Glenn Stevens says Sydney house prices are ‘exuberant’ but more rate cuts may come

The Governor of the Reserve Bank Glenn Stevens has hardened his rhetoric, warning of a bubble in Sydney property and saying it is hard to escape the conclusion that Sydney house prices “look rather exuberant”.

But he said “a balance has to be found” between the housing market and the rest of the economy and the Reserve Bank board cannot allow Sydney’s property boom to dominate its consideration of the “real economy”.

Credit conditions are only one of several factors at work here. But credit conditions are very easy.

Speaking in New York overnight, Mr Stevens also warned the Abbott government had “little choice” but to accept a slower return to surplus in coming years, saying a huge fall in Australia’s terms of trade has hit state and federal government revenues hard.

He said Australia’s economy was still trying to adjust to the largest terms of trade shock it has faced in 150 years, with a huge drop-off in investment in the resources and energy sector “exerting a major dampening effect on demand”.

In a speech called “The World Economy and Australia,” Mr Stevens said governments around the world were putting “too much weight” on monetary policy “to try to achieve what it can’t”.

He said “any help in boosting sustainable growth from other policies would, of course, be welcome,” in reference to government fiscal policy.

His comments come a day after Treasurer Joe Hockey intimated that the Abbott government would take longer to return the budget to surplus than it had planned, saying the government was now “aiming at” smaller deficits in relation to the size of the economy, rather than in dollar terms, as plunging iron ore prices punch a hole in the government’s books.

Mr Hockey has also said that he will not be looking for major cuts to improve the budget bottom line, acknowledging the dampening effect this could have on growth.

Mr Stevens said the Reserve Bank has “clearly signalled a willingness” to lower interest rates further and the question of whether interest rates should be reduced “has to be on the table.”

He also said easier monetary policy was helping to stimulate non-mining sector growth, particularly in the housing sector through increased prices and with housing starts projected to reach high levels this year. But he admitted Sydney’s housing market was a concern.

“Popular commentary is, in my opinion, too focused on Sydney prices and pays too little attention to the more disparate trends among the other 80 per cent of Australia,” Mr Stevens said.

“That said, it is hard to escape the conclusion that Sydney prices – up by a third since 2012 – look rather exuberant,” he warned.

“Credit conditions are only one of several factors at work here. But credit conditions are very easy. So while the conduct of monetary policy can’t allow these financial considerations to dominate the ‘real economy’ ones completely, nor can it simply ignore them. A balance has to be found,” he said.

Mr Stevens told the audience at The American Australian Association that it was a good time to recall the commitment “we all made” in the G20 meetings in Australia last year to agree on the goal of an additional rise in global GDP of 2 per cent over five years.

“Those commitments were not actually about monetary policy, they were about other policies,” Mr Stevens said.

“It will be important this year, after one of the five years has passed, to see whether we are all making good on our various promises.”

Australia’s official cash rate is currently 2.25 per cent, and most economists expect further cuts in coming months.

SMH/ April 21, 2015