The RBA believes there's no housing bubble just yet, but says it will intervene if Australians go crazy on debt

(SMH, Dan Himbrechts)
  • The Reserve Bank of Australia (RBA) Board remains unconcerned with an Australian housing bubble for now, Governor Philip Lowe told a parliamentary committee on Friday.
  • While prices have rebounded strongly in recent months, Lowe said the central bank didn’t think growth was unsustainable just yet, but was keeping a close eye on the amount of debt Australians are racking up.
  • Meanwhile, Lowe ruled out using quantitative easing (QE) to more aggressively grow the economy and create jobs.
  • Visit Business Insider Australia’s homepage for more stories.

The Reserve Bank board has been grilled on its economic strategy, as easy money continues to flow into the economy and the property market heats up.

Appearing before the standing committee on economics in Canberra, Governor Philip Lowe defended the trajectory Australia’s recovery was taking, noting it was already “stronger than we were expecting”.

“The outcomes for GDP and the labour market have been at least as good as the upside scenarios we published last year. Employment growth, retail sales and new house building have all been strong and measures of consumer and business confidence have also improved,” Lowe said.

Turning to property, Lowe noted that a “resilient” market was only helping buoy confidence in the economy, but that the RBA was watching on with interest as growth drivers diverged.

“There are many moving parts. We’ve got record low interest rates, a shift in preferences to houses and regional locations, very large government incentives for first homebuyers, the slowest population growth in a century, very high rates of house building, and a serious decline in apartment rents in Melbourne and Sydney,” he said.

But while “the RBA does not and should not target house prices”, Lowe emphasised that credit remained a major concern.

“Our focus is on the lending that is used to purchase housing. We want to see lending standards remain strong. At present, there are few signs of a deterioration in these standards. If that were to change, you could expect that we would be discussing possible responses,” he warned.

“It’s possible that these low interest rates generate unsustainable growth in asset rates but they haven’t yet. It’s possible but not yet.”

The Board said it remains a possibility that Australians could became overleveraged, indicating a bubble was forming.

“What we can have an influence over is how much borrowing occurs on the back of those asset prices. That was our focus a number of years ago,” Lowe said.

“Remember housing prices were rising very quickly, investors were rushing into the market, they were borrowing on overly generous terms, we thought those trends in debt were unsustainable and through the council of financial regulators, we worked with APRA and my colleagues at the Bank, we put in some place some measures and that would be our approach again.

“It’s the debt that goes with the asset prices that would be the unsustainable element of it.”

Right now however, “the level of asset prices based on many metrics does not seem too high and the level of debt and the lending standards don’t seem inappropriate.”

Accelerated QE rejected for now

Curiously, while Lowe was pushed on the premise that easy money policy could “eat away at the nation’s equity”, he was also grilled over why he hadn’t expanded the RBA’s bond-buying program.

Since March last year the central bank has been purchasing bonds, increasing the money supply as part of its quantitative easing (QE) program.

Labor MP and economist Andrew Leigh accused the RBA of being “too timid” in growing the economy, with Lowe admitting it was unlikely Australia would hit 2-3% inflation before 2023.

“If you had announced $200 billion of QE on Tuesday rather than $100 billion, would your forecasts for wages in 2022 be higher or lower?”

Lowe however defended the Board’s position, saying “any shift in those forecasts would have been marginal” due to the ensuing weakness in the Australian dollar and bond yields.

“We haven’t ruled out further bond purchases after the current program… if we need to keep doing that we will.”

However, he refused to concede that there was justification for going beyond the current level, when pushed on why the Board wasn’t doing more.

“By that logic you would just keep going and going and going,” Lowe said.

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