Over
the past five years, house prices have risen at a compound rate of 8.7 per cent a year as rapid population growth outstripped growth in the stock of dwellings.
While the net migration gain has eased, it remains historically high, while on the supply side, the building industry is hard up against capacity constraints.
Incomes, it need hardly be said, have not been growing by 8.7 per cent a year.
The cumulative effect is a household debt-to-income ratio around 170 per cent, which is very high by historical standards, and a household debt-to-GDP ratio of 92 per cent, which is very high by international standards.
The Reserve Bank, you might think, should not just be looking at whether these ratios are still getting worse, but also at how stretched they already are.
But it may not be.
Deputy governor Geoff Bascand said in a speech last week: "The question we are assessing is whether the same restrictions are needed in the current environment where debt levels remain high but are not deteriorating, now that bank lending standards have tightened significantly and rapid growth in credit and house prices have stabilised. If these conditions continue we expect to gradually ease the policy in coming years."
The excess demand in the housing market has built up over years and it will take years to unwind. As long as it persists, it will put upward pressure on house prices and rents.
The only question is how high those prices have to go to burn off, to frustrate, that excess demand and clear the market.
That depends on several factors: what is happening to incomes; what is happening to interest rates; what incentives the tax system provides; how open the market is to foreign money; how hearty the banks' appetite for risk is; and what macro-prudential curbs the Reserve Bank imposes on their lending.
It relaxed LVRs somewhat a year ago. Since then, housing debt has been growing slightly more slowly: 6 per cent in the year to September compared with an average 6.7 per cent a year over the previous four years.
But that is still likely to be faster than incomes. Gross weekly wage and salary earnings rose 5.2 per cent in the year ended September (in aggregate, not per household) and they represent the lion's share of household incomes. So the aggregate debt-to-income ratio is unlikely to have come down much, if at all, from its vertiginous height.
And whereas a year ago the Reserve Bank was able to point to rising mortgage rates as a reason for relaxing LVRs, this time the reverse is true.
Fixed mortgage rates have been trending lower for months now. A couple of banks have been offering loans below 4 per cent.
No surprise, then, that the latest Real Estate Institute data for October record a pick-up in house sales volumes, up 9.3 per cent on September as Westpac economists seasonally adjust them and a good indicator, they reckon, of at least a short-term boost to prices.
They could always be wrong about that, but at these levels the Reserve Bank should wait and see before it loosens the regulatory reins and risks spurring the market on from a trot to a canter.
A reason sometimes advanced for relaxing LVRs is that to a large extent they were targeted at investors, often highly leveraged, and they have done the trick.
In September, the share of new lending going to investors was 21 per cent, down from 26 per cent two years ago, while the share going to first home buyers rose from 12 to 17 per cent over the same period.
The possibility of a capital gains tax might reinforce that trend. But the Government has promised that any change to the tax laws arising from the current review would not take effect until after the next general election, still nearly two years away.
As for the ban on foreign buyers which came into effect last month, no doubt it will not be long before people find cunning ways of circumventing it.
And while it may be true that right now the net balance of greed and fear within the banks is tilted towards the latter, that can always change.
The latest credit conditions survey of the banks, which the Reserve Bank carries out, seems to indicate a less restrictive attitude towards residential lending than six months ago as competitive pressure mounts.
Opponents of LVRs like to point to the hypothetical stress tests which indicate whether banks' solvency could withstand severe negative shocks.
But as Bascand said last week, it is difficult to capture the real-world complexities of a financial crisis within formal modelling approaches used for stress testing.
"The GFC also demonstrated that the dangers to our banks may not lie just in the quality of their asset portfolios but in their ability to roll-over their funding, and at what cost. In other words liquidity can be the catalyst for financial stability risk."
This is especially relevant given how reliant we are on importing the savings of foreigners to fund bank lending.
Those risks may be mitigated by pushing out the maturity profile of that funding and a high level of foreign exchange hedging, but they cannot be eliminated altogether.
The bottom line is that our current high levels of household debt are underpinned by low global interest rates and an exceptionally high domestic employment rate.
Either of those things could reverse, and quickly, leaving a lot of borrowers struggling to pay the mortgage and having to cut back on all sorts of other spending.
Even as it is, the latest household economic survey found 7.5 per cent of owner-occupiers and 21 per cent of other households paying 40 per cent or more of their gross incomes in housing costs.
The Reserve Bank should beware of any move that could make that worse.
