Video settings

Please Log in to update your video settings

Video will begin in 5 seconds.

Video settings

Please Log in to update your video settings

RBA warns Aussie dollar set to plummet

Governor of the Reserve Bank of Australia, Glenn Stevens says the overvalued dollar will fall, 'and not by just a few cents'.

PT1M18S http://www.canberratimes.com.au/action/externalEmbeddedPlayer?id=d-3ba5q 620 349

The Reserve Bank has warned home owners that "people should not assume that prices always rise" when deciding to buy property.

"They don't; sometimes they fall," said the Reserve Bank's governor Glenn Stevens, addressing the International Econometric Society in Hobart on Thursday.

In comments aimed squarely at people betting on future capital gains, Mr Stevens cautioned property buyers, and singled out Sydney as the overheated market in the country.

Glenn Stevens: “People should not assume that [house] prices always rise. They don’t; sometimes they fall.”

Glenn Stevens: “People should not assume that [house] prices always rise. They don’t; sometimes they fall.” Photo: Bloomberg

It is the latest warning from the Reserve Bank over the property market, which is being fuelled by record low borrowing costs and has attracted attention from economists here and overseas.

Barclay's chief economist Kieran Davies said the Australian housing market was "very expensive". Prices were at or near record highs when assessed by key metrics, he said. "He [Mr Stevens] is just making it clear to buyers, particularly investors, that they should be careful in how much debt they take on," Mr Davies said.

The International Monetary Fund last month also said Australian houses were among the most expensive in the world when compared with both household incomes and rents, two common ways of valuing property.

The dollar plunges

The dollar plunges.

Despite his warning on the property market, Mr Stevens said the Reserve Bank did not think there was a case to raise interest rates to prevent the market overheating.

Price growth slowed in the latest quarter, and Mr Stevens also said it would be beneficial for the economy if the slowdown in prices persisted "for a while".

"If the next couple of years saw an unremarkable performance on prices, and construction staying at the higher levels that will clearly be reached over the coming year, it would be an outcome that would contribute to a balanced growth path for the economy and to housing more people at manageable cost," Mr Stevens said.

The comments come after Mr Stevens this week left the official interest rate at a record low 2.5 per cent – where markets expect it will stay for the rest of this year.

The Reserve Bank also believes the Australian dollar is set to plunge, "and not by just a few cents".

At US94¢ to the dollar, Australia's current exchange rate was far too high, he said.

"Lest there be any uncertainty about this, let me be clear, again, that the exchange rate remains high by historical standards," Mr Stevens told the conference. "When judged against current and likely future trends in the terms of trade, and Australia's still high costs of production relative to those elsewhere in the world, most measurements would say it is overvalued, and not by just a few cents."

Following his comments, the currency dropped about US0.5¢ to US93.92¢

Mr Stevens' comments come as warm weather and poor consumer confidence battered local retail sales, which notched a 0.5 per cent fall in turnover for May.

The Australian Bureau of Statistics figures, released on Thursday, showed that Victoria recorded the biggest fall of 1.1 per cent. NSW was next with a fall of 0.5 per cent. Among the categories, department stores fell 2.6 per cent; clothing, footwear and personal accessories fell 2.3 per cent; household goods fell 0.9 per cent; and other retailing fell 0.4 per cent. There was a 0.1 per cent rise in food retailing and a 0.1 per cent rise in cafes, restaurants and takeaway food.

With Stephen Cauchi