Reserve Bank of Australia (RBA) governor Glenn Stevens has warned that Australia is at risk of creating a property bubble driven by low interest rates.
In a speech to the Anika Foundation in Sydney yesterday, Mr Stevens said the RBA may be forced to raise interest rates within the next year while unemployment is still rising.
The comment was at odds with previous statements from the RBA that they would keep interest rates on hold as the jobless rate crept steadily higher towards forecasts of 8 per cent.
Following Mr Stevens’ speech, financial markets upgraded the odds of an interest rate hike by the end of the year to 60 per cent – up from about 15 per cent on Monday – predicating the official cash rate to climb above 4 per cent from the current 49 year low of 3 per cent.
Mr Stevens said the downturn was not as deep as initially expected but the prospect of artificially high housing prices was a threat to sustained recovery.
“The decline in interest rates together with the additional grants for first home buyers has seen a significant pick-up in demand for housing finance,” Mr Stevens said.
“In contrast to developments in so many other countries, house prices are tending to rise and arrears rates on the bulk of mortgages remain very low.
“A very real challenge in the near term is to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices.”