Housing bubble just a few years away?

Senior Australian bank leaders have had a change of heart regarding domestic house prices and the potential for a bubble.

ANZ (ASX: ANZ) chairman John Morschel says although we may not yet be experiencing a bubble in prices, the current environment could lead to one. Mr Morschel’s comments come on the back of solid rises in property prices in capital cities around the country. According to RPData, house prices rose by an average of 5.5% last month alone – no doubt spurred on by the current interest rate environment.

Continuing low interest rates are a result of the Reserve Bank of Australia’s intention to stimulate spending and growth in non-mining sectors such as retail, manufacturing and construction. The cuts to rates have however not been as influential as the central bank would like.

If the RBA again intends on cutting interest rates to boost lagging construction activity it risks a lower Australian dollar — which would fuel higher prices in the housing sector. Senior Goldman Sachs trader, Richard Coppleson, said, “The RBA doesn’t want to fuel a property bubble – they will never admit it publicly but they must be worried after what we saw in NZ when rates went too low.”

New Zealand has recently implemented “macroprudential policies” to curb rising house prices by placing restrictions on bank lending. These are rules which many economists, including RBA Governor Glenn Stevens, criticise because they encourage poor lending practices.

Mr Morschel went one step further and said New Zealand’s central bank has used “a sledgehammer to crack a walnut” and believes the RBA’s chief has been more sensible. “I think the governor of the RBA here is pretty reasonable in terms of his approach. He’s issuing warnings, but not classifying it as a bubble and just saying it’s something they are watching very, very closely.”

Commonwealth Bank (ASX: CBA) boss Ian Narev also says the current strategy used by the RBA is working well, “The best defence is good, conservative, prudent bank management, and I think we have that.”

Foolish takeaway

Although we may not yet be experiencing a property bubble, it’s important for Australians to understand that we are not immune from such a run-up in prices. Lack of supply and two decades of consistent growth have, seemingly, rewarded investors in any asset class but with mining investment slowing, growth might be more modest in coming years. As always, investors should respond to rising prices and diversify earnings across multiple assets including, but limited to, international shares, Australian shares, property, cash and bonds.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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