Reserve Bank governor Glenn Stevens has predicted a boom in the Australian housing construction market but recognised that our level of borrowing is a risk to the property market.
“We are going to have a boom in residential construction over the next couple of years. That is very much on track,” Mr Stevens told a Hong Kong conference.
The Australian dollar jumped to a four-month high after a speech in which Mr Stevens also said there was early, encouraging evidence the handover from mining to non-resources industries in the Australian economy was under way.
He also addressed concerns about a domestic housing bubble. “There are some people who think that Australia is in a bubble,” Mr Stevens said. “You can never be 100 per cent sure. But the price to income ratio has been around four times ... for about 10 years, so a very long-running bubble, if it is a bubble. Most do not last that long.”
Mr Stevens also indicated that the Australian dollar was too high.
“The long-running equilibrium of the exchange rate is probably lower and we have been quiet consistent in saying that,” he said.
“It is worth giving some thought to where the currency was when terms of trade were soaring,” he said. ”We didn’t feel it was appropriate to try to limit that given the size of the event.
“When the terms of trade started to fall, we thought that was odd.
“Happily enough the currency is now well down off its peak. From here it really depends what you think the fundamentals will do.”
"Our assumption is that the terms of trade will fall further. We think commodity prices will be softer than where they have been in recent past.
"It will be quite a surprise, if that comes to pass, if the Australian dollar doesn’t depreciate along with that.
Nevertheless it was "unavoidable" that the outlook for the Australian economy would remain uncertain during the transition, he said.
"Because we are trying to assess the balance between very different forces ... there is inevitably a very substantial range of uncertainty surrounding this central outlook," Mr Stevens said in his keynote speech to the Credit Suisse Asian investment conference in Hong Kong this afternoon.
"That is simply unavoidable. The fact is that no one can say with certainty just how smooth a 'handover' will occur. Nor can anyone pretend to be able to fine tune it."
He added that the lower exchange rate was supporting the handover.
Following the speech, the Australian dollar surged from US91.66¢ to US91.96¢, a fresh four-month high.
The local currency has been edging upwards over the past few days, with expectations that China would push through a range of stimulus programs to boost its slowing economy boosting the Australian dollar, analysts said.
"It is unlikely, though, that a pick-up in resources exports, as important as that will be, will be enough to keep overall growth on the right track," Mr Stevens said.
"It will be helpful if some of the other areas of domestic demand that have been subdued start to grow faster," he said, adding that for that to occur household savings need to improve and businesses need to have "a bit more confidence about the future than they did before".
But he said "progress is being made" and there were "encouraging handover signs" from the mining sector to an improvement in other areas, such as business conditions and housing.
Mr Stevens also focused on China in his speech, noting recent indicators, including industrial production and retail sales, have shown possible signs of slower growth in the early part of 2014.
"Given that the growth target was more than met last year, and given that the Chinese New Year holiday period makes it more difficult to assess trends in the data, it may be a little too early to draw strong conclusions," he said.
"Spot prices for steel and iron ore have fallen lately though, on movements to date, seem within the range seen in recent years. In fact people may be too inclined to fret over what are still relatively small movements in monthly PMIs and the like in China."
Mr Stevens said it was still a little too early to tell if the slowdown in China is a "large one".
"People are still too inclined to fret about what are monthly movements in PMIs (performance of manufacturing indexes) and sometimes they fret even before movements in American data.
"The greater concern is the risks involved in the build up of credit in shadow banking in recent years.
"Recent credit events have focused on the possibilities of failure," he said in reference to the corporate sector.
Turning to the Australian economy, Mr Stevens said he was seeing a "fascinating divergence between the views of foreign observers, especially in Asia, many of whom say to me 'Australia is doing very well' and the tone of the commentary at home, which is typically a lot more pessimistic".
"My reading of the actual data is that they suggest that the economy has been doing a bit better than much of our domestic commentary over the past couple of years would have you believe, but not quite as well as many foreign investors seem to have thought."
With Jens Meyer and Glenda Kwek