3 / 7 / 2019 the housing market and the economy | speeches | rba speech the housing market and the economy philip lowe [ * ] governor address to the afr business summit sydney – 6 march 2019 thank you for the invitation to address this year's afr business summit. it is good to be back here again. as you would be aware, the reserve bank board met yesterday and left the cash rate unchanged at 1. 5 per cent. i would like to use this opportunity to highlight some of the issues we discussed at the meeting. before i do that, though, i would like to focus on the housing market and its implications for the economy. readers of the monetary policy minutes would have noticed that at its february meeting the board discussed a special paper taking a deep dive into this topic. my remarks today draw from that paper. i will first focus on the current state of the housing market. then, i will discuss the main drivers of recent movements in housing prices, before turning to the implications for the broader economy and the financial system. the current state of the housing market australians watch housing markets intensely, perhaps more so than citizens of any other country. over the five years to late 2017, they saw nationwide housing prices increase by almost 50 per cent ( graph 1 ). since then, prices have fallen by 9 per cent, bringing them back to their level in mid 2016. https : / / www. rba. gov. au / speeches / 2019 / sp - gov - 2019 - 03 - 06. html 1 / 18 3 / 7 / 2019 the housing market and the economy | speeches | rba graph 1 declines of this magnitude are unusual, but they are not unprecedented. in 2008 and 2010, prices fell by a similar amount, as they did on two occasions in the 1980s. in the 1980s, the rate of cpi inflation was higher than it is now, so in inflation - adjusted terms, the declines then were larger than the current one. these nationwide figures mask considerable variation across the country ( graph 2 ). the run - up in prices over recent years was most pronounced in sydney and melbourne, so it is not surprising that the declines over the past year have also been largest in these two cities. in perth and darwin, the housing markets have been weak for some time, affected by the swings in population and income associated with the mining boom. by contrast, the housing market in hobart has been strong recently. in adelaide, brisbane, canberra and many parts of

market, while still not high, has probably increased. given this, it is prudent for both borrowers and lenders to be careful. quite appropriately, the australian prudential regulation authority ( apra ) has been discussing this evolution of risk with financial institutions for some time, and there has been a strong focus on maintaining appropriate lending and risk - management standards. as has been well publicised, the members of the council of financial regulators, including the bank and apra, have also held discussions regarding the merits of additional measures within the existing prudential framework. if risk has increased, then it might be appropriate to adjust one or more of the elements within that framework to reflect that change in risk. it is also important to point out that the fact that the bank and apra are talking about these issues does not mean that a return to the type of heavy regulation we saw in earlier decades is on the agenda. that earlier experience demonstrated all too clearly the distorting effects of such regulation as well as the ability of financial institutions to circumvent it, including by activities outside the regulatory net. as it turns out, the financial system is very good at finding ways of getting money from the people who have it to those who want to borrow it, although perhaps less good at containing aggregate risk. all this means that we need to be realistic about what can be achieved through changes in the regulatory parameters alone. this realism, however, need not preclude consideration of modest and sensible changes within the existing prudential framework. obviously, another relevant issue is the overall level of interest rates. as i have said, low rates have boosted asset prices globally, including in our own housing market. the judgement that the reserve bank board has reached is that in australia these low rates are entirely appropriate. they are required to assist in the necessary balancing of the australian economy following the once - in - a - century boom in resources sector investment. this is especially so when the exchange rate has not been providing the degree of support that might normally have been expected. the low interest rates are helping boost construction activity and spending more broadly in the economy. this is the transmission mechanism at work. but just like the situation internationally, as the period of very low interest rates continues to run on, we all need to be cognisant of how risk is changing. lenders need to ensure that their lending standards remain sound and that they hold the appropriate amount of capital against the risks they face.