The Reserve Bank Comments On The Housing Market
Ric Battellino, Deputy Governor of the Reserve Bank of Australia (RBA), spoke this month at the 6th Annual Housing Conference and raised some interesting points about how the housing market has changed over the past 10-15 years.
Three key questions were posed by Mr Battellino:
1. Are we building enough dwellings?
2. Is there enough housing finance?
3. Why are dwelling prices in Australia high relative to income?
The first point covered by Mr Battellino was whether we are building enough dwellings to sustain demand for accommodation? Consistently low residential vacancy rates are a clear indicator that there is a lack of housing, namely in the Sydney metropolitan area. According to Mr Battellino, this shortfall is not because we have cut back on investment in dwellings. The opposite is in fact true - dwelling investment is currently higher (equating to around 6% of GDP) than it has been in the past. It is believed the shortfall in housing comes down to four factors:
1. Australians now spend up to 60% more on each new dwelling than they did around 15 years ago.
2. People are spending more money on improving or increasing the size of their existing home.
3. New homes being built are replacing existing houses.
4. A significant proportion of dwelling investments are holiday and second homes.
Secondly, Mr Battellino discussed whether there is enough housing finance. Significant changes in the structure of housing finance over the past couple of years has seen lenders who fund themselves through securitisation, cut back on new lending. The major banks have picked up on this and now account for approximately 80% of all new housing loans. Concerns about whether borrowers have sufficient access to loans and whether lending costs will increase has, according to the RBA, not been substantiated and we should not be overly concerned.
The third point discussed by Mr Battellino was why housing prices in Australia appear high relative to our income when compared to other countries. In his speech, Mr Battellino explained that lower interest rates have allowed households to take out bigger home loans without increasing repayments. We simply have more buying capacity now than we used to. Most of our population is concentrated in capital cities where house prices are higher. Despite this, our arrears rates on housing loans are much lower than those in the United States even though our ratio of house prices to income is higher.
Mr Battellino explained that there are a couple of reasons why we seem to be able to sustain higher house prices:
1. we spend less of our income on non-housing consumption (for example, our health costs are lower) thus can service can service larger loans, and
2. we are more active in repaying our loans than those in the United States thus reducing the risk of getting into financial difficulty.
While overall it appears we have the financial capacity to sustain a high ratio of house prices to income, this is not evenly distributed across all demographics. The baby boomer generation, having benefited from nearly 20 years of prolonged economic expansion, are now in a strong financial position and can afford to spend money on housing.
Unfortunately the same cannot be said for many first home buyers (aged under 35 year) who, due to rising house prices can find it difficult to raise the deposit needed. Currently a typical house deposit equates to around one and a quarter years’ income - almost twice that needed 15 years ago. Previously, lenders were responding to this by lowering the deposit required. Now, Governments are assisting first home buyers with grants, stamp duty concessions and subsidised bank accounts to help them save.
To read Mr Battellino’s speech in full, visit the Reserve Bank of Australia website: www.rba.gov.au.
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