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The link between property bubbles and financial crises is not always as clear as people think, according to the Reserve Bank of Australia.
Head of financial stability Luci Ellis told the University of Adelaide last week that the Reserve Bank faced a difficult job in trying to reduce the level of risk in the economy.
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Ms Ellis said in her speech that a build-up of risk “might or might not manifest as a boom in asset prices and credit”.
She added that “rapid developments” in property markets and credit do not always mean that risks to financial stability are building.
Ms Ellis also said that economies can crash without any bubble in asset prices being apparent.
“This is particularly so in property markets, where supply is inherently more or less fixed, because most of it has already been built,” she said.
“In that case, large price and construction cycles can happen that appear completely consistent with fundamentals.”
Meanwhile, Reserve Bank governor Glenn Stevens revealed during last week’s cash rate decision that Australia was experiencing “moderate growth” in consumer demand and a “strong expansion” in housing construction.
“Interest rates are very low and for some borrowers have edged lower over recent months. Savers continue to look for higher returns in response to low rates on safe instruments,” he said.
“Credit growth has picked up a little. Dwelling prices have increased significantly over the past year, though there have been some signs of a moderation in the pace of increase recently."
[Related: RBA finds big spenders overvalue their homes]
