RBA official warns of housing bubble

Source : Business Times – 30 Sep 2009

His comments fan speculation that monetary policy will be tightened in Nov

A top Australian central banker yesterday warned that housing prices could rise too fast if interest rates were kept low for too long, fanning speculation that monetary policy would be tightened as soon as November.

Anthony Richards, head of economic analysis at the Reserve Bank of Australia (RBA), told a housing forum that mortgage rates were unlikely to stay at their current low levels indefinitely, and that there was a risk that housing prices could rise too fast.

On Monday, governor Glenn Stevens said that rates will be raised in a timely manner, but declined to say when the first hike would be.

He added that keeping rates at record lows for too long would create economic imbalances.

Unlike the US and UK, where house prices have tumbled amid the global downturn, Australian house prices have held up remarkably well, rising 4.2 per cent in the March to June quarter.

‘This is a good thing, because of the macroeconomic difficulties that have accompanied those price falls in some countries,’ Mr Richards said.

‘But, looking forward, the risk is that we might move towards undesirably strong growth in Australian housing prices.’

Record levels of immigration and the highest population growth in 25 years have meant that there were more people looking for homes at a time when construction has been running well below historical norms.

Underlining the strength of the economy, Treasurer Wayne Swan announced that the government’s budget deficit had come in A$5 billion (S$6.1 billion) less than expected at A$27.1 billion in the year to June 30.

The government’s net debt position stood at A$16.1 billion for the year, a hefty A$11.5 billion better than forecast.

‘The budget will move back into surplus by the end of 2012-13, ahead of the government’s previous estimate of the end of 2015-16,’ Citi analyst Joshua Williamson said.

That assumption was based on a government commitment to cap spending at 2.0 per cent a year above inflation.

Expectations of rate hikes had already received a boost after an influential columnist said that it was almost certain that rates would rise to 3.25 per cent in November, and to 3.5 per cent in December.

The RBA’s monetary policy board meets next on Oct 6, and few expect it to lift its 3.0 per cent cash rate at that point.

But based on overnight indexed swaps, investors are pricing in a 64 per cent chance of a 25-basis-point rate hike in November, and are more than fully priced for December.

Investors had seen around an even chance of a November rate hike, but that increased after columnist Terry McCrann wrote that, absent a shock, the RBA was almost certain to raise rates by 25 basis points in both November and December.

Mr McCrann has a mixed track record on rate moves but has been right enough times in the past for investors to suspect that he has inside sources at the RBA, making them sensitive to his calls.