RBA Says Housing Prices Broadly In Line With Fundamentals Based On User-Cost Models

By Sophia Rodrigues

(Sydney, October 8, 2021)—Current signals from timely data are mixed but based on user-cost models, housing prices remain broadly in line with fundamentals, the Reserve Bank of Australia said Friday.

The RBA made the comments in the Financial Stability Review publication that it produces twice a year.

The RBA acknowledged that strong price growth and extrapolative price expectations can lead to over-exuberance in housing market but in real time it is difficult to determine if prices are over-valued.

Based on user-cost models which compare the relative costs of owning versus renting a property and thus takes into accounts factors like the decline in interest rates, housing prices remain broadly in line with fundamentals, the RBA said.

On the other hand, based on cruder metrics like price-to-rent and price-to-income ratios, prices have increased markedly, the RBA added.

The RBA said there have been large increases in housing prices and acceleration in borrowing in Australia and it has led to a build-up of systemic risks associated with high and rising household indebtedness.

To address this risk, the Australian Prudential Regulation Authority increased the rate used for serviceability assessment of mortgages which will lead to a reduction in maximum loan sizes.

In the report, the RBA said low long-term sovereign interest rates, and optimism by financial market participants about business incomes, have continued to contribute to high and rising asset prices and increased risk-taking.

But some asset prices appear high given the pandemic still presents a risk to economic activity, the RBA said.

“Further, price falls could be widespread if interest rates were to increase sharply due to unexpected inflation or rising risk premiums,” it added.

--Contact: Sophia@centralbankintel.com