RBA analyst warns of housing bubble risk in 2010

Lack of new housing will increase demand that could cause a housing bubble next year, the Reserve Bank’s head of economic analysis, Tony Richards, warned yesterday.

The warning comes on the last day before the increased first home owner’s grant, which helped shore up housing prices during the downturn, will be downgraded before disappearing altogether in January.

In a speech to the Committee for Economic Development of Australia yesterday, Richards said housing affordability will become worse if supply does not keep up with the growing population.

“It is looking increasingly clear that Australia has avoided the large falls in housing prices seen in some other countries over the past two years or so,” he said. “This is a good thing because of the macro-economic difficulties that have accompanied those price falls in some countries.”

“But looking forward, the risk is that we might move towards undesirable strong growth in housing prices.”

Richards said some people are “fixated” with property prices, but warned that the RBA board consider the performance of the entire economy when making interest rate decisions, not just the property sector.

He also warned rising housing prices may not accurately reflect the wealth of the nation, as continued growth would put housing affordability out of reach for many people.

“When the price of housing rises, higher-income houses tend to benefit at the expense of lower-income households,” he said. “As a nation, we are not really any richer when the price of housing rises, but the more vulnerable tend to be hurt. We don’t want very strong growth in housing prices that would be unhelpful from a social perspective.”

”Nevertheless, if housing affordability is a concern, it will be necessary to keep working to reduce impediments to the construction of new housing, both inside our cities and at the fringes.”

Ken Morrison, NSW executive director of the Property Council of Australia, agrees and says governments must do more to ensure the supply of housing continues as the population grows.

“What we are seeing is a lack of supply. Prices have indeed been resilient, but we are not seeing supply and when you have growing demand that is going to be a problem, and will see inflationary pressure. The comments from the RBA yesterday indicate there is a big economic risk if we get this wrong.”

“We’ve seen changes in government, but we need to see more. We’re still charging new developments with very large infrastructure taxes in NSW, and there is not enough focus of getting supply of housing into existing suburbs. There are plans, but that needs to translate into actions on the ground.”