Many Aussies believe our housing downturn was caused by factors like unemployment, interest rates or even the banking royal commission.
But according to RBA governor Philip Lowe, there’s a different and surprising factor that really kicked it all off.
Speaking at the Australian Financial Review’s business summit this morning, Dr Lowe revealed falling prices were the result of sudden spikes in population — and a lack of available dwellings to meet that demand.
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But now supply has caught up with that earlier increased demand — and as a result, prices have started to fall.
“The origins of the current correction in prices do not lie in interest rates and unemployment,” Dr Lowe told guests.
“Rather, they largely lie in the inflexibility of the supply side of the housing market in response to large shifts in population growth.”
Dr Lowe also claimed in the five years to 2017, house prices grew by almost 50 per cent — but they have since dropped 9 per cent, meaning they are now at 2016 levels, with the Sydney and Melbourne markets the hardest hit.
He said while Australia’s population started to climb rapidly in the mid-noughties, it “took the better part of a decade for the rate of home building to respond”.
“It took time to plan, to obtain council approvals, to arrange finance and to build the new homes. Not surprisingly, house prices went up,” Dr Lowe said.
But despite the significant drop in prices, particularly in our two biggest cities, Dr Lowe said stagnating wage growth was a bigger problem than a housing downturn when it came to the broader economy.
And he also rubbished the suggestion that tightening lending practices had played a significant role in driving down prices, claiming only around 10 per cent of Australians borrowed the maximum they are offered by banks — a move he deemed “sensible”.
However, he also warned against lenders tightening the reins too much.
“ … credit conditions tightened more than was probably required. Now, as lenders continue to seek the right balance, we need to remember that it is important that banks are prepared to take credit risk,” he said.
While many homeowners in our capital cities have been watching the housing market with increasing anxiety, Dr Lowe also stressed the market had been through similar cycles before and recovered.
“Declines of this magnitude are unusual, but they are not unprecedented,” he said.
“In 2008 and 2010, prices fell by a similar amount, as they did on two occasions in the 1980s.”
Dr Lowe’s address comes just one day after the RBA decided to leave official interest rates at 1.5 per cent, and he told attendees there was little chance of a rate rise in 2019.
“It’s hard to think of a scenario where interest rates would need to go up this year,” he said.
“Inflation pressures are very benign, wage growth remains low and the current rate of wage growth is unlikely to generate an inflation rate of 2.5 per cent.”
AFR editor-in-chief Michael Stutchbury said the “big boom” that sparked the house price correction was not interest rates or employment figures but rather the lack of available properties and the delay in constructing new dwellings as populations soared.
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