Australia | Mar 26 2009
By Chris Shaw
Has the Australian housing market bottomed? While such a question is one for which the answer won’t be known until sometime after the fact the Reserve Bank of Australia’s (RBA) economics analysis department head Anthony Richards suggested in a speech to the 4th annual Housing Congress in Sydney this week while the sector has softened somewhat in recent months, there are a few factors that should at least reduce the sector’s vulnerability in the current economic slowdown.
In his address Richards pointed out much of the softening in the sector of late has been at the high end, which he presumes reflects the fact residents of such suburbs have a greater level of exposure to recent developments in global financial markets. Prices fell less sharply in other sectors of the market, the overall result being a fall in prices of around 3% across the market through 2008.
This compares favourably to the double-digit falls recorded in the US and UK markets. Richards also noted the falls in housing approvals and other broad measures of economic activity have similarly been less significant in the Australian economy.
What should help support the Australian housing market going forward, in Richards’s view, is improving affordability, as he points out the recent significant falls in official interest rates and therefore mortgage rates are having a positive impact not only on the economy overall but more specifically on affordability in the housing sector.
Using an index of the ratio of average household disposable income to the principal and interest repayments on a new mortgage for a median-priced dwelling shows purchase affordability has recently improved significantly in the Australian market.
Richards noted official interest rates have fallen by 400 basis points since September of last year and because Australian banks are relatively healthy compared to global peers over the same period their standard variable housing rates have fallen by 375 basis points.
The big difference for Australia compared to many other nations is that most mortgages in Australia are variable rate agreements and not fixed rate loans and this means affordability has improved a lot here while lower interest rates have not flowed through to an improvement in affordability by nearly as much elsewhere.
Richards noted these falls in interest and mortage rates have reduced the debt servicing burden of the household sector by around 5% of household disposable income. This means the cash flows of households are improving. It has also made home ownership more accessible for potential buyers.
Could the current low level of interest rates cause Australia to experience the kind of mortgage problems seen in America in coming years?
Richards doesn’t think so as Australian bank lending standards were never reduced to the same extent as was the case in the US, as evidenced by US banks having a far higher proportion of non-performing loans now on their books.
As well, Richards noted many of the lenders more likely to have made such risky loans have now scaled back their activity in the Australian market thanks to their difficulties in accessing credit markets in the wake of the global financial crisis.
House prices to income levels are also an important determinant of affordability and Richards noted while this ratio remains slightly above its long-term average at present, it has declined significant since 2003. This further supports his view affordabillity has improved.
Some other factors add additional cause for optimism as Richards noted since 2003 growth in household incomes has exceeded growth in consumption, which is a positive for the savings rate. Over the same period growth in housing credit has also slowed, meaning the equity share of the national housing stock is again increasing.
It is reasonable to argue housing prices in Australia are a reflection of demand and the collective decisions by households to pay such prices. But Richards suggested supply side issues impact on the market as well and they have equally played a role in supporting Australian house prices.
Home building has been at relatively low levels in recent years, with commencements running at just 147,000 in 2008 and at even lower levels in the last part of last year. Richards suggested this implies lower levels of construction activity generally in coming months, but improved affordability should eventually translate into increased home building activity particularly given the current state of undersupply.
This is supported by some estimates of underlying demand being as high as 180,000-200,000 dwellings annually and while Richards offered no estimate for demand he did suggest the low national rental vacancy rate is indicative of a fairly significant current housing shortage.
What should provide something of a boost is the Federal Government’s stimulus packages, particular the extention of the first home buyers scheme and the National Rental Affordability Scheme, which Richards saw as supportive of home building activity in coming years.
In conclusion, Richards’ view is the consolidation seen in the housing sector in recent years, along with the improvements in affordability from higher savings and lower mortgage rates, leaves the Australian housing sector far less vulnerable in the current economic downturn.