Economy's balancing act keeps bubble at bay

Low interest rates provide the potential for rapid house price gains to continue, although other factors will press in the opposite direction, according to Deloitte's Access Economics team.

"Measures of mortgage stress - that is, the ability of households to service their housing debt - remain well below their average over the last decade," said Deloitte's David Rumbens and Michael Thomas in an article accompanying the firm's Australian Mortgage Report for 2015, launched yesterday.

In assessing whether a bubble really is building up, Deloitte notes that households can afford to borrow more, although there is "vulnerability" if interest rates increase. Furthermore, it says access to credit remains high due to low funding costs for banks and increased competition.

"An increase in building sector activity will help to smooth the transition resulting from the end of the mining investment boom by absorbing mining construction sector workers," says the report.

"It will make the RBA's delicate balancing act on interest rates easier if there are broader reasons to suggest there should be an interest rate hike - not just rapid house price growth in two markets led by investors."

The report notes that some countries - notably New Zealand - have introduced additional macroprudential measures intended to help in the case of a 'bubble' and improve their economies' resilience to shocks emanating from the financial system. But, in contrast, Australian regulators have expressed their satisfaction with the current arrangements.

While the RBA has commented on the current strength of investor activity in the housing market, especially in Sydney and Melbourne, it has not advocated new macroprudential policies to quell house prices.

"To date, Australia's financial system and its current approach to dealing with systemic risk - which consists of informal discussions between the APRA and the RBA, public communication and limited macroprudential powers - has proven to work well, including during the GFC," the Deloitte report says.