Reserve Bank says house price crash will not improve affordability

A Reserve Bank official warns that if Australian house prices dropped, affordability would not necessary be any better than it is now.

The bank's head of financial stability Dr Luci Ellis was speaking at a Sydney University urban planning forum on the role of housing in the global financial crisis.

Dr Ellis presented evidence that loan repayments are not unusually high at present, despite the sharp rise in house prices, thanks to record low interest rates.

She also argued that overseas experience during the crisis showed that if prices came off it would likely mean there were other issues in the economy that would make housing unaffordable.

"One of the key messages I drew from a lot of the presentations and the supporting paper was that housing crashes do not improve affordability," Dr Ellis said.

"Housing prices are lower, yes, but capacity to pay is also lower and it's something that is not well understood outside these sort of professions [economists and urban planners]."

In order to prevent such a damaging crash, an American expert on housing said that Australia needs to be very wary of building too much while prices are high.

Kirk McClure, a University of Kansas professor and US government advisor, said the US housing market is still in recovery after building almost double what was required in the run up to 2007.

He said official figures show that, even after the housing driven financial crisis, the US is still building more homes that it has new households to occupy them.

Professor McClure warned that Australia must learn from America's mistakes.

"If there is any strong message for Australia it's that we need careful growth management," he told the forum.

"The industry is very good at building, it unfortunately is not very good at reigning itself in when it reaches over-built condition."

An Irish property analyst also said Australia should consider measures to curb investor demand for property.

Ireland suffered one of the worst property collapses in the crisis, with house prices halving following a huge increase in investors buying.

Dr Michelle Norris from the University College Dublin said the building boom was originally started by reports of a shortfall in housing supply.

"But that solution kept being applied as the credit boom boomed and boomed, and there was absolutely no action on the demand side of the equation," she said.

"One of the reasons the additional supply didn't help to moderate house prices was a huge expansion in empty dwellings so, by the bust, 16.7 per cent of dwellings were empty."

Local construction associations have been calling for a relaxation in rules and more land to be released, but the Reserve Bank has concerns about some markets being over supplied.

Professor McClure has urged caution about this because, while the American and Australian economies are very different, the principles are the same.

"It is a different context but I think the take away is simple - be very careful, it is easy to over-stimulate markets and cause too many units to be built," he said.

"Goodness knows, once they are built it's real hard to work out an overhang."

Dr Ellis, after listening to the previous speakers, noted that Australia is a long way from a housing oversupply nationally, but it needs to be closely monitored.

"Supply is increasing, and that's an expected result of the current stance of monetary policy and it is needed to house the growing population, and it is needed as part of the handover from the end of the mining investment boom in that other sectors need to, and now have the scope to, expand more quickly than they did," she said.

While the Reserve Bank says that Australia has a housing shortage nationally, it has recently warned of oversupply dangers in some regions, such as an apartment building boom in inner-city Melbourne.