Reserve Bank governor Glenn Stevens is happy with a slowdown in house prices, signalling interest rates could go lower if necessary to boost the economy.
In a speech in Hobart, Mr Stevens also warned investors and everyday retailers that the Australia dollar could suffer a “significant fall”.
The Reserve this week left official interest rates on hold at 2.5 per cent. It has left rates at these 50-year lows since August last year.
With rates down there has been a pick-up in house prices, particularly in Sydney. Prices in Perth lifted by about 1.1 per cent through June but are down by 0.3 per cent so far this year.
Mr Stevens said the lift in prices over the past 12 to 24 months was a good thing as it showed interest rates were helping the economy.
But prices could not continue to grow too sharply as they would cause their own problems for the country.
“It remains to be seen whether this slower pace of growth in dwelling prices is temporary or more persistent,” he said.
“It would in my opinion be good, for a range of reasons, if it did persist for a while.
“If the next couple of years saw an unremarkable performance on prices, and construction staying at the higher levels that will clearly be reached over the coming year, it would be an outcome that would contribute to a balanced growth path for the economy and to housing more people at manageable cost.”
There has been debate in financial markets when the Reserve will lift rates from their current low level.
Mr Stevens said in real terms – after inflation – interest rates in Australia were “approximately zero”.
He suggested an extended period of stable rates, or even a cut, could be expected.
“In either nominal or real terms the cash rate is well below ‘normal’ levels, and comfortably below even the mooted lower ‘new normal’ levels,” he said.
“Moreover, we still have ‘ammunition’ on interest rates – we have not got close to the zero lower bound that has afflicted some other countries.”
The bank has made no secret about its concerns of the impact of the strong Australian dollar which earlier this week went over the US95 cent mark.
Mr Stevens said there would be a step-down in the dollar somewhere along the line.
“We think that investors are under-estimating the likelihood of a significant fall in the Australian dollar at some point,” he said.