When it comes to housing bubbles, our Reserve Bank prefers not to use the word ‘bubble’ at all. It doesn’t even want us to think about it.

Luci Ellis, the RBA’s head of financial stability, appeared before a senate committee in Canberra last week to talk about housing affordability.

Thanks to that meeting we now know that the central bank will soon announce how it plans to clamp down on speculative investor activity in the runaway property markets in Sydney and Melbourne.

Ellis said the RBA was very concerned about the rate at which house prices were growing. But she refused to use the word ‘bubble’ to describe house prices in Sydney, which have risen by 15 per cent in the past year.

“I don’t think that’s a particularly helpful way to frame the problem,” Ellis told senators.

“What matters is how much speculation there is in the market and what that might mean for a subsequent price cycle, and at the moment there is more speculative activity than we are comfortable with.” But given her dislike of the word, it was still surprising to learn that the RBA doesn’t spend much time trying to identify housing bubbles.

Ellis admitted so. And her reasoning does make sense. As she put it, when you try to pinpoint bubbles, “you end up with a debate about whose model is best, and people who confidently announce that prices have deviated X amount from fundamentals are usually using some pretty simple metrics to devise that, and they usually turn out to be quite misleading,” she said.

“People will confidently proclaim that they can identify bubbles but usually they end up identifying 18 of the last three [property] crashes.”

Ellis said some models may look only at the run-up in house prices, but “that is often not helpful”. “The run-up in prices in the United States was not big compared to some of the markets that didn’t have the same kind of crash,” she said.

“You have to look at the whole picture, including whether there’s been overbuilding – which there was in the US and in places like Ireland. You have to look at what lending standards were and what the resilience of the household sector is, to who can afford house prices.”

She said that’s what the RBA and the Australian Prudential and Regulation Authority have been doing – looking at the bigger housing sector picture.

But having taken that look, they’ve decided to do something about it.

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Posted by Gareth Hutchens – The Age Money on 8th October, 2014