Scott Murdoch – In a speech in Sydney today, Mr Stevens said at a time of rising unemployment it would be “disturbing” for policy makers if there was not more supply coming on to the market which would ensure prices remained under control.

The central bank boss also warned that for global policy makers “challenges abound”, especially the threat of inflation beginning to rise at a time when real economic activity was starting to gain traction.

“A very real challenge in the near term (for Australia is) how to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices,” Mr Stevens said.

“Given the circumstances the economy moving to a position of less than full employment, with labour shortages lessening and reduced pressure on prices for raw material inputs, this ought to be the time when we can add to the dwelling stock without a major run-up in prices.

“If we fail to do that, if all we end up with is higher prices and not many more dwellings, then it will be very disappointing, indeed quite disturbing.”

The Reserve Bank may remove its easing bias on monetary policy at the August meeting, as financial markets back the prospect of higher interest rates over the next year.

The interbank futures market now predicts the cash rate of 3 per cent could be up to 95 basis points higher by July next year, indicating the RBA could order up to four official rate hikes.

The national housing market has held up well during the current economic downturn, which economists have attributed to the government’s increased first home owners grant.

As part of the two rounds of fiscal stimulus worth $60 billion, the government extended its first-home owners grant at $21,000 for new homes and $14,000 for existing homes until the end of September. It will then be stepped down to $14,000 for new homes and $10,500 for existing homes until the end of the year.

“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.
“The value of loan approvals has risen by about a third since the low point in the middle of 2008.

“In contrast to developments in so many other countries, house prices are tending, if anything, to rise, and arrears rates on the bulk of mortgages remain very low by historical and international standards. “In fact, across some portfolios arrears rates have declined in recent months.”  Mr Stevens also said the global outlook had improved and emphasised the role of business and consumer sentiment and confidence in helping to lift economic conditions.

Mr Stevens said central banking and regulatory authorities would soon start to deal with winding back some of the emergency stimulatory measures put in place in the past year, especially after the collapse of investment bank Lehman Brothers in September. “For their part, banks will need to reduce their reliance on the extended guarantees and stand on their own feet before too much longer,” Mr Stevens said.

“The banks of the United States and Europe are starting down this path on their wholesale issuance, having recognised that it is in their own interests to do so.

“It would make sense for Australian banks, which have accounted for 10 per cent of global issuance of government-guaranteed bank debt over the past nine months, to step up their efforts to do likewise.”

Earlier today, RBA assistant governor Malcolm Edey said the government’s wholesale funding guarantee had served its purpose, but an exit strategy needed to be an important priority.

The RBA official said the guarantee fee structure was designed with an automatic exit in that banks would stop using the guarantee when market conditions allowed funding costs to return to more usual levels.

Some degree of international co-ordination in exit strategies was also required, though some countries could move independently, Mr Edey said.

“It’s important to have some degree of co-ordination (but) I wouldn’t say everyone has to do everything all at once,” the RBA official told a Senate inquiry hearing in Sydney.