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Max Carnage

News: RBA comments warn on house prices

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RBA comments warn on house prices


October 01 2010, 6:42PM

Comments from the Reserve Bank of Australia (RBA) about the housing market this week were seen as a hint about the short term interest rate outlook.

But they also have implications for the long term outlook for housing prices.

In the Financial Stability review on Thursday, the RBA noted that "growth in dwelling prices has tapered off in recent months, particularly in more expensive suburbs".

This was seen as a recognition of abating inflationary pressures, meaning the RBA might be less inclined to raise the cash rate at its monthly monetary policy meeting on Tuesday.

However, there is more to the RBA's remarks than its implications for interest rates on Tuesday.

It was also a reminder that the big housing price rises over the past couple of decades were a one-off event rather than a permanent feature of the investment landscape.

"Dwelling price-to-income ratios rose significantly between the 1980s and the early 2000s, likely explained by the structural changes of disinflation and deregulation that occurred over that time," the RBA said.

The comment about disinflation - a slowdown in the rate of price rises - is important.

To put that into perspective, if housing prices beat CPI inflation by the same margin as they have in the past quarter century, and rents just keep pace with the CPI growing by 2.5 per cent annually, then rental yields would be only marginally over one per cent in 20 years.

Finding an investor willing to buy into the market at that yield could be rather tough, even in Australia's often euphoria-fuelled housing market.

There is of course a third alternative, and one that makes a whole lot more sense - accepting that the pace of housing prices in the coming decade or two is going to be well under what we have all come to expect.

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