Expect slow house price rises AUSTRALIA'S transition to a low-inflation economy means slower increases in housing prices and more occasions when they are falling, according to a top central banker. The head of the Reserve Bank of Australia's financial stability department, Luci Ellis, said the move to low-inflation in the 1980s and 1990s had meant lower interest rates. That in turn meant lenders felt comfortable increasing the size of their loans compared with household incomes. "It shows that even if nothing else changed, the loan-to-income ratio that households could prudently obtain would have almost doubled as a result of disinflation," she said in a speech in Sydney on Tuesday. This transition to bigger loans took time, as old, smaller loans were only gradually paid off. And it took a while for housing prices to make the full, upward adjustment. "But the transition does end after a while, and it is our assessment that it has now ended," Dr Ellis said. The ratio of housing debt to household income has been "broadly flat" since 2005, about a year after the ratio of housing prices to income levelled off. The transition has also changed the way households save and spend. As housing prices were rising, the proportion of household income being saved - something which includes paying off debt - fell to around zero. But it's since returned to positive territory. Just where the saving ratio, as it's called, will settle is difficult to predict. "But given it has actually been quite stable for the past five years, it seems reasonable to suppose that where we are is at, or close to, a 'new normal'," Dr Ellis said. The end of the transition to higher prices and the return to a stable saving ratio had implications for the future. "First, trend housing price growth will be slower in future than in the previous 30 years," she said. The RBA did not have a strong view on whether housing prices should be "mildly rising, falling or constant" compared with incomes. But we think it is very unlikely to return to its 1970s levels, or to rise rapidly once again. Nor, she said, did the RBA want to see another boom like the one in the early 2000s. "A second implication is that, if housing price growth is now cycling around a lower average, there will be more periods when prices are falling (a little) in absolute terms," she said. That justified the insistence by APRA, the financial regulator, that banks take greater account of the risk of losses from default by borrowers. A third implication is that banks should lower their expectations for balance sheet growth. "We have been making this point for a while," Dr Ellis said. We would not want banks to ease their lending standards to make more loans and bring back the boom times.