Is it time to get worried about the housing market? A SmartCompany Q&A

RBA Governor Glenn Stevens has shaken up the property market by saying what everyone who reads the auction results in the Sunday papers has been thinking for months – property prices are very, very high and the amount of debt Australian property owners are taking on is getting to dangerous levels.

The fact that Stevens used his first ever television interview to make this point has rightly made plenty of commentators sit up and take notice – it is clear that the RBA is becoming increasingly concerned about the potential for a property bubble.

But is Stevens trying to gently talk down the market? Or has he delivered a blunt warning that there is big trouble around the corner?

Let’s break it down with a SmartCompany Q&A.

I’ve been watching the auction results around my suburb and I reckon the value of my house is soaring. What’s Glenn Stevens so worried about?

There’s no doubt house prices are flying right now and plenty of people are feeling pretty rich because of it. But that’s exactly the attitude that Stevens is trying to curtail – this idea that property is some sort of guaranteed path to wealth and you should never be worried about borrowing large amounts to buy a house.

This is a real problem. As economist Shane Oliver pointed out in his piece yesterday, in the last 20 years the ratio of Australia’s household debt to annual disposable income has increased from 40% to 155%, mainly due to increased borrowing to buy property.

As Stevens said: “I think it is a mistake to assume that a riskless, easy, guaranteed way to prosperity is to be leveraged up into property,” he said.

“It isn’t going to be that easy.”

So he’s worried about debt more than house prices?

No, the two go hand in hand. He’s worried that houses are becoming so expensive that people are willing to take on dangerously big debts. And the issue of affordability is clearly on Stevens’ mind too.

“If we think about property prices as parents… I’ve got kids that within not too many more years are doing to want somewhere of their own to live and you wonder, you know, how is that going to be afforded because the prices are getting quite high.”

So is the RBA really worried about the potential for a property bubble?

Stevens is too cautious to ever use the word “bubble”. But the way he has come out and made such a point of warning people about debt and property should be taken as a clear signal that the Bank is very worried about this issue.

“The Reserve Bank is clearly trying to send a message to mums and dads as opposed to financial market participants, that unless the growth in house prices moderate, the risk is a property bubble could develop,” CommSec’s chief economist Craig James said yesterday.

What can the RBA do to take the heat out the market?

Yesterday Stevens tried the softy-softly approach with his television warning. But the real way to do it is to raise interest rates. That will force home buyers to rethink the amount they can borrow, and rethink the amount they are willing to pay for property.

Great, higher interest rates. Something to look forward to.

That’s inevitable. Rates are still below what the RBA considers to be “normal” levels, and most economists expect rates to climb from the current level of 4% to between 5% and 5.25%.

Now, no-one likes rising interest rates I know. But you probably like the idea of a property bubble bursting – and sending the value of your home through the floor – even less.

We need to take some heat out of this market and rates look like the only way to do it.

Is there really a chance property prices could plunge?

Probably not. As many economists have pointed out, housing shortages and increasing population growth should underpin the market.

What most commentators expect to see – and what Stevens hopes to see – is a moderation in the rapid house price growth we’ve seen over the last six to 12 months.

We take the heat of out the market and the bubble problem should fade.

Hmm… So after all that, tell me – do I need to be worried about the housing market?

That depends on your personal circumstances. I think what Stevens is trying to do with his comments is to get households thinking about how the housing market relates to them.

How much debt have you taken on to buy your property? How will you be affected if interest rates were to rise 2%? How much should you borrow for that next renovation? Should you buy that dining setting on credit?

And perhaps most importantly, if the value of your home was to fall 10%, how would that affect you?

If you can afford to service your debts now and in the future when rates are higher, then you’re in a good position. If not, then it’s time to rethink your household balance sheet.

If we all do that – and that’s really what Stevens wants – then we should have a sustainable property market.

If we keep borrowing on the assumption that house prices will just keep going up, then we could be headed for trouble.