Reserve Bank of Australia Governor Glenn Stevens has voiced his concerns about a correction in Australia’s housing market and the effect low interest rates are having on the market.
Mr Stevens spoke about the creation of asset bubbles in the current low-interest rate environment at the recent Committee for Economic Development of Australia (CEDA) lunch in Adelaide.
His concerns were that despite assurances from the four big banks that current house prices and levels of household debt are sustainable, popular markets in cities like Sydney and Melbourne were in danger of creating a housing bubble.
"As for things that monetary policy should try to avoid, we are also cognisant of the fact that monetary policy does work initially by affecting financial risk-taking behaviour," Mr Stevens said.
"In our efforts to stimulate growth in the real economy, we don't want to foster too much build-up of risk in the financial sector, such that people are over-extended. That could leave the economy exposed to nasty shocks in the future.
"The more prudent approach is to try to avoid, so far as we can, that particular boom-bust cycle," he said
"It is stating the obvious that at present, while we may desire to see a faster reduction in the rate of unemployment, further inflating an already elevated level of housing prices seems an unwise route to try to achieve that."
REINSW President Malcolm Gunning said the RBA made the correct decision to keep interest rates at 2.5 per cent, but warned consumers of the potential increase.
“We must once again caution those seeking to take out a mortgage to ensure that they are realistic with their abilities to service debt. Interest rates will not remain at these record lows and future interest rate increases must be factored in,” Mr Gunning said.