According to figures from the Domain group, Sydney house prices surged 22.9 per cent in the last year, the fastest pace since the 1980’s.
The surge, surpassing growth recorded in the 2001 and 2002 booms according to the Domain’s Dr Andrew Wilson, takes the Sydney median house price past the $1 million mark, making it more expensive than London.
The bubble continues to create an increasing challenge for regulators. Reserve Bank Governor Glenn Stevens stressed yesterday in an address to the Anika Foundation Luncheon titled “Issues In Economic Policy”, that we need to take a longer term view of momentary policy and the implications of record low interest rates. Stevens remarked:
The risk, however, is that this process can lead to a mindset in which policymakers end up responding to quite short-term phenomena, using instruments that take quite some time to have their full effect, including effects that might actually turn out to be adverse.
Stevens is warning any benefit in dropping interest rates now to support jobs and growth is likely to be outweighed by fueling the housing bubble, that could collapse with far more devastating and adverse results.
It is not quite good enough simply to say that evidence of continuing softness should necessarily result in further cuts in rates, without considering the longer-term risks involved. Monetary policy works partly by prompting risk-taking behaviour. In some ways that is good: in some respects, there has not been enough risk-taking behaviour. But the risk-taking behaviour most responsive to monetary policy is of the financial type. To a point, that is probably a pre-requisite for the ‘real economy’ risk-taking that we most want. But beyond a certain point, it can be dangerous.
Reading between the lines, while the housing market bubble in Sydney and Melbourne, two of Australia’s largest markets remains out of control, we can expect to see any changes to the official cash rate on hold as the economy slows and unemployment ticks up. Stevens also remarked, growth of less than three per cent will be the new normal for Australia.
» Median house price in Sydney tops $1 million for first time – The Australian Financial Review, 23rd July 2015.
» Issues In Economic Policy, Address to the Anika Foundation Luncheon – The Reserve Bank of Australia, 22nd July 2015.