RBA reveals the downside of rising house prices

The Reserve Bank of Australia has warned that rising property prices are creating risks in the economy and are unlikely to improve the wealth of the nation.

In an address to the 54th Shann Memorial Lecture, deputy governor Philip Lowe outlined the significant implications of rising property prices on Australian households.

“Ever-rising housing prices, relative to our incomes, do increase risks in the economy and are unlikely to make us better off as a nation,” Mr Lowe said.

Mr Lowe said that rising property prices have significant implications on future generations of Australians, who could struggle to afford their own homes.

This in turn has negative ramifications for Australian parents who are increasingly using capital gains to help their children purchase property, he added.

“For an older person who owns their own home and has no children, the capital gain from the higher land prices more than offsets the expected higher future housing costs,” Mr Lowe explained. “Such a household is better off.”

The same is true for owners of investment properties, since they own multiple dwellings on which they earn a capital gain, Mr Lowe said.

However, for young homeowners with multiple children, it is possible that the higher future expected housing costs could exceed the capital gain on their dwelling, he said.

“Many parents around the country look at the high housing prices and worry their children will not be able to afford the type of property they themselves have been able to live in, even if their children were to have the same lifetime income profile as they have had,” he said.

“In effect, these parents are doing the present discounted value calculation and they see the potential problem.”

Trends in the intergenerational transfer of wealth are gradually changing. The RBA is now seeing more first-home buyers receiving loans from family and friends.

The RBA has also seen evidence of younger generations receiving increased assistance with household expenses from older generations, including by continuing to live in the family home.

“It is quite likely that these trends will continue with it becoming more commonplace for parents to help their children in the property market,” Mr Lowe said. “This has both economic and social consequences.”

The result means that fewer parents will be able to use the capital gains that they have benefited from to boost their own consumption, Mr Lowe said.

“Instead, they will be using those capital gains to support the following generations with their higher housing costs,” he said.

“Alternatively, if it turns out that today's generation use their capital gains to increase their own spending, then they will have less ability to help their children.”

If this were to happen, Mr Lowe said he suspects that, over time, there would be some downward pressure on property prices relative to incomes, as future generations deal with the high cost of housing.

[Related: Reserve Bank warns of more boom and more debt]

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