According to some commentators, the Australian housing market is now in an unprecedented bubble with house prices having hit unsustainable levels across parts of Sydney and most of Melbourne.
Recent data from CoreLogic RP indicates that home values for major Australian cities was up 9% year-on-year in May, with Sydney and Melbourne topping the list with gains of 15% and 9% respectively.
On the face of it, 9% year-on-year gains do not stand out as unsustainable price increases, at least when compared to the gains seen running up to the 2008 GFC. However, when looked at in the context of overall price inflation and level of personal income, it’s clear that housing prices are most definitely becoming a big issue for Australians.
Two sides of the tale
In a recent article for Financial Review, Christopher Joys, says that:
“The dollar value of [Australian] homes, mortgage debt and house prices measured relative to incomes, and the share of speculative investors purchasing properties, have never been higher”.
He goes on to suggest that the culprit for the bubble can be placed squarely at the feet of the Reserve Bank. By slashing the cash rate to 2%, bank loan rates have plummeted to under 4%. With the Australian share index down over 8% since April, many investors have been unable to find meaningful yields without taking on large risks in the property market.
However, the other side of this story is that, in some quarters, house prices are not considered to be in bubble territory. Speaking to ABC last week, Assistant Treasurer Josh Frydenberg told the program that he disagreed with views that there is a housing bubble. He went on to say “housing price have gone up, but they went up higher in the early 2000s.”
But even though Frydenberg believes there is no bubble, it’s clear that concern over house prices is mounting, which is why the RBA continue to bring the matter up in their monthly policy meetings.
What does all this mean for the Aussie dollar?
If the housing market is in an exuberant stage, the logical step for the RBA would be to initiate measures to slow down house price increases and inhibit real estate speculation.
That could come in the form of policy initiatives or rate hikes but ultimately that would be hawkish for the Aussie dollar, which would probably see the currency advance.
However, for the RBA, the task is not that simple. The bank must also balance economic growth and core inflation. With commodity prices weak and with a declining mining sector, there are many different factors to take into account.
And then of course, there's the matter of international comparison, since a currency can only be valued against what it might be worth in other countries.
When it comes to the major currencies, all have experienced significant price moves of late, with the US dollar showing the most strength ahead of anticipated monetary tightening in the States later this year.
Bottom line
On the face of it, there is clearly confusion as to whether the housing market in Australia has moved into unsustainable territory. And usually, when there is confusion it’s a sign that the market is probably not in a bubble. At least, not yet.
“There is only so much that monetary policy can do for house prices in today’s economic climate. More policy conversation is needed and following Treasurer Joe Hockey’s infamous ‘get a better job’ soundbite, hopefully this will be the catalyst for real discussions around policy to be stepped up.”, said Dane Williams from VantageFX.
Because of this, there is little to suggest that the RBA are anywhere near ready to raise rates. And as a result, there is little to suggest that the Australian dollar (which has been in a firm downward trend since 2011) will change its direction.