Reserve Bank warns on housing prices

The governor of the Reserve Bank has warned home owners not to bet that property prices will keep rising especially in the hot Sydney market.

Glenn Stevens says borrowers should be wary about taking on too much debt, reminding speculators that while property prices can rise, they can also fall.

Mr Stevens also said that while current household debt levels were not " disastrous " he'd be worried about an acceleration of credit growth to home buyers.

Business editor Peter Ryan has been listening to Mr Stevens' comments before the House Economics Committee in Sydney and he joins me now in the studio.

Peter, there's been stellar growth in Sydney property prices over the past six months or so. Is Glenn Stevens worried that investors are going to get burned?

PETER RYAN: Well Peter, so far the Reserve Bank hasn't been buying into concerns about a property price bubble especially in Sydney, but in the past the Reserve Bank has said that fears about a potential bubble are "excessively alarmist", but what Glenn Stevens has been saying this morning is that the rapid price growth seen in the late 1990s and early 2000s won't be repeated.

He even went on commercial breakfast television four years ago to appeal to mum and dad investors rather the professional investors about the risks in property.

But now in 2014, interest rates are at record lows and are banks competing for business, so there are dangers that home buyers could borrow too much and get burned when rates start rising, or rising unemployment could create mortgage defaults and falling property prices.

So Glenn Stevens delivered this timely reminder when he addressed the House Economics Committee in Sydney this morning.

GLENN STEVENS: I would repeat what I've said before, then Sydney in particular, but not just Sydney now. There's been a very big run-up in investor activity and that's okay but people need to keep in mind prices don't just rise, they can fall.

They have fallen and we need to be careful that we don't take on too much leverage on the expectation that ever rising prices for the asset make that work out because I think that would be a dangerous assumption.

PETER LLOYD: That's the Governor of the Reserve Bank, Glenn Stevens. In the studio, business editor Peter Ryan.

Now Peter, Mr Stevens also talked about household debt which is an area the Reserve Bank watches very closely. Is that a new danger zone when mixed with rising property prices?

PETER RYAN: Well, the household debt is always a potential danger zone for the Reserve Bank but since the global financial crisis, households have been paying down a lot of debt and in recent years we've been hearing a lot about the cautious consumer and that's been reflected in economic data such as retail trade.

Even so, there's been a gradual pickup in credit to households recently but still that's in the 5 to 6 per cent per year range.

But to use Glenn Stevens' words that "that's not disastrous". That was an interested phrase that he used to show that he's concerned that, if household debt moves up to the next level, and when you combine that with the willingness of banks to lend, we could be into a new era of trouble.

GLENN STEVENS: I don't think we're going to go back to the 15, 17 per cent growth that we saw for many years and I do think if we did see that, we should be asking whether that's wise given the levels of debt that households begin from.

As you know, I haven't been amongst the people who say that the present level of household debt relative to income or relative to assets is disastrous. I'm not in that camp, but I am in the camp that says it's pretty high now and we'd surely be asking for trouble if we see a big step up from where we are.

PETER LLOYD: Reserve Bank Governor, Glenn Stevens before the House Economics Committee in Sydney this morning.

Now Peter Ryan, Glenn Stevens was also asked about the role of foreign investment in driving up property prices in major cities like Sydney. Does he see problems there?

PETER RYAN: Well, Glenn Stevens, he said that he does do a lot of travel through Asia on stopovers through Singapore and for example there he sees there's a lot of interest in Australian property speculation.

But he says that Australians appear to like to being open to foreign investment, and housing investment is after all, a form of that - the same way foreigners buying shares in listed companies here.

Mr Stevens says it can't be beyond Australia's capacity to meet the demands of both foreign buyers and the legitimate demands of Australian citizens but if there was a supply constraint, Mr Stevens said that would be a legitimate issue worth addressing but Mr Stevens said this really comes down to how welcoming Australia is to foreign investment and that is an issue that he appeared to be quite comfortable in handing over to the Australian Government.

PETER LLOYD: And finally did he have any light to shed on interest rates?

PETER RYAN: Well, judging by the comments about property prices and household debt Peter, it seems that interest rates are on hold at that low of 2.5 per cent. Mr Stevens said there would be a period of stability in the cash rate - something he said before but he didn't know how long rates would hold steady.

There was a tiny bit of changed language. In the past Mr Stevens said there might be scope to cut again. Today before the House Economics Committee he said I don't think we need to cut again at this point in time.

Now Mr Stevens has been trying to pull the Australian dollar lower, closer to its long term average of about 85 US cents, but those comments of no more rate cuts actually pushed the dollar as high as 91.11 US cents and it's now a little bit lower but that was a bit of excitement on currency markets this morning.