To be sure, with interest rates still very low and the supply and demand imbalance at least a little bit skewed towards a small housing shortage, house prices are likely to be supported. That assumes, of course, that the recent increase in the unemployment rate is not sustained, nor is damaging to the credit quality of mortgage holders. These are big assumptions at the moment when overlayed with a worrisome fall in real wages.
The RBA is slow to recognise the turning point in house prices. While some jawboning of house prices is no bad thing, they are afterall still high, the RBA risks holding monetary policy too tight because of this misreading of the housing market.
Treasurer Joe Hockey was spot on today with his comments at the Bloomberg Summit in Sydney. Mr Hockey said, "Australia fundamentally doesn't produce enough houses to meet demand, it is just an infinite mantra for international commentators, for analysts based overseas to say 'well, you know, there's a bit of a housing bubble emerging in Australia'. That is rather a lazy analysis, because fundamentally we don't have enough supply to meet demand. That doesn't suggest there's a bubble; there might be a price increase of some substance, but you'd expect the market to react and produce some more housing."
And with building approvals running near record levels, the supply side is responding. Mr Hockey gets it, it seems.
Mr Hockey and his team would be wise to raise this at his next meeting with RBA Governor Stevens. Let's hope the RBA does not make a policy mistake of holding monetary policy inappropriately tight as it fights last year's battle. It doesn't need to tighten policy given the house price boom is slowing, it is just that not many people including those at the RBA are aware of it.