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‘Crazy’ house prices set to get crazier, RBA warns

A senior Reserve Bank Australia (RBA) official warns house prices in Sydney, and parts of other cities, could continue to rise in the face of record low interest rates.

Speaking in Canberra on Monday, RBA assistant governor Christopher Kent said the current cash rate of 2 per cent had boosted land prices, wages for construction workers and property developers’ profit margins.

But Dr Kent said in Sydney, and some parts of other cities, the amount of unsold lots suitable for development appeared to be unusually low.

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“Shortages are most evident in Sydney, where greenfield land releases have not kept pace with recent strong demand,” he said.

“Also, some of the bank’s liaison contacts are concerned that the stock of suitable sites for apartment developments in Sydney has been depleted in the past few years.

The RBA says house prices are on the rise.

The RBA says house prices are on the rise. Photo: AAP

“Inflation in new dwelling costs has risen to be almost two percentage points above its average.”

Dr Kent said evidence suggested that two interest rate cuts this year were working as they should, by boosting consumer spending and borrowing for housing.

But he said spending on renovations was down and lots of borrowers were responding to the low rates by paying down their loans more quickly.

Dr Kent’s comments backed those of RBA governor Glenn Stevens, who said last week he was very concerned about the Sydney housing market, labelling parts of it “crazy”.

Speaking on monetary policy transmission on Monday, Dr Kent said the RBA was working with other regulators to assess and contain risks that could arise from the current housing market.

“As the bank has noted for some time now, large increases of housing prices, if accompanied by strong growth of credit and a relaxation of lending standards, are a potential risk for economic stability,” he Kent said.

Dr Kent said very low interest rates were supporting the Australian economy despite “strong headwinds” keeping a lid on growth.

He said low rates were having their usual effect on the economy but the drop in mining investment, state and federal budget cuts and the exchange rate were working against the central bank’s efforts.

The RBA cut the official interest rate to a historic low of 2 per cent in May and held steady at the same rate in June.

with AAP

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