Aqua Wealth | RBA won’t create risky new housing boom
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RBA won’t create risky new housing boom

RBA won’t create risky new housing boom

The current interest rate cutting cycle, which began in November, is not aimed at boosting house prices or “re-igniting a boom in borrowing,” says RBA governor Glenn Stevens.

Delivering a speech in Adelaide today called “The Glass Half Full”, Stevens said one thing Australia should not do is “try to engineer a return to the boom”.

Stevens said he agreed that there was a need for more confidence in the economy among households and businesses, but said it had to be “the right sort of confidence”.

“The kind of confidence based on nothing more than expectations of ever-increasing housing prices, with the associated willingness to continue increasing leverage, on the assumption that this is a sure way to wealth, would not be the right kind.

“Unfortunately, we have been rather too prone to that misplaced optimism on occasion.

“You don’t have to be a believer in bubbles to think that a return to sizeable price increases and higher household gearing from still reasonably high current levels would be a risky approach.

“It would surely be a false basis for confidence. The intended effect of recent policy actions is certainly not to pump up speculative demand for assets. As it happens, our judgement is that the risk of re-igniting a boom in borrowing and prices is not very high, and this was a key consideration in decisions to lower interest rates over the past eight months,” he said.

In his address to the American Chamber of Commerce, Stevens also tackled the nature of the current two-speed economy, blaming it in part on spending habits before the GFC, when property prices were rising by 6% per year.

He said the dissatisfaction felt in certain sectors of the economy reliant on household spending was not the result of the mining boom not spilling over into these sectors “but a lot to do with events that occurred largely before the mining boom really began”.

These events, he said, were that “household spending grew faster than income for a lengthy period up to about 2005” and gross debt rising from 70% in 1995 to about 150% in 2007 principally as a result of people investing in housing.

“Correspondingly, by 2007 the share of current income devoted to servicing that debt had risen from 7% to 12%, despite interest rates in 2007 being below those in 1995,” said Stevens.

“It is still not generally appreciated how striking these trends were. I cannot say that it is unprecedented for spending to grow consistently faster than income, because it had already been doing that for the 20 years prior to 1995.

“That is, the saving rate had been on a long-term downward trend since the mid- 1970s. But it is very unusual in history for people to save as little from current income as they were doing by the mid-2000s,” Stevens said.

“And it is very unusual, historically, for real assets per person to rise at 6 per cent or more per annum. It is also very unusual for households actually to withdraw equity from their houses, to use for other purposes, but for a few years in the mid 2000s that seemed to have been occurring,” he said.

Overall, he said the Australian financial system is sound and the country well placed.

“Our government is one among only a small number rated AAA, with manageable debt. We have received a truly enormous boost in national income courtesy of the high terms of trade.

“This, in turn, has engendered one of the biggest resource investment upswings in our history, which will see business capital spending rise by another 2 percentage points of GDP over 2012-13, to reach a 50-year high,” he said.

[blue]Source: http://www.smartcompany.com.au/property/050129-rba-won-t-create-risky-new-housing-boom-glen-stevens.html [/blue]