Central Bank Upbeat on House Prices in Australia

The housing market in Australia has held up pretty well compared with countries such as the US and the UK, where prices have fallen in the order of 20 per cent.

This was one of the messages Ric Battellino, Deputy Governor of Australia’s central bank, The Reserve Bank, delivered to the Urban Development Institute of Australia in Brisbane Today.

The Australian market was fairly subdued in 2008, he told listeners, with prices falling on average by 3 per cent across Australia.

Some states – such as Western Australia which had a late boom – are now experiencing larger falls than average. Prices at the top end of the market have also been softer, no doubt reflecting the deleveraging that is taking place among high income households following the global financial crisis.

Mr Battellino went on to outline his reasons for believing that the Australian property market would be more robust than those elsewhere most important of which was the fact that Australia did not fall prey to the deterioration in lending standards that occurred elsewhere.

By and large, the vast majority of Australians who took out housing loans have been able to afford the repayments. The 90 day arrears rate on housing loans is only 0.5 per cent, broadly in line with its long-term average, and well below that in countries such as the US and UK.

In the period ahead, there will be forces pulling the arrears rate in opposite directions.

On the one hand, as unemployment rises, more households will have difficulty continuing to service their housing loans.

On the other hand, the very large reduction in interest rates has greatly reduced the debt servicing burden of households. On an average-sized mortgage, loan repayments are now $7,000 a year less than they were six months ago. This is a very large reduction, equal to about 8 per cent of average household income.

The majority of households have chosen not to spend the money that has been freed up. Rather, they have maintained high repayments and are therefore moving ahead of schedule in repaying their loans. This will give them breathing space if they do subsequently find themselves in circumstances where their repayments are interrupted.

Mr Battellino also said that even after the large fall in wealth over the past year, Australia’s household sector was still in a relatively sound position.

Looking at household balance sheets, on the liabilities side, households on average have debt equal to about one and a half year’s income. On the assets side, they have a property valued about 4 years’ income and financial assets equal to 2.5 years’ income.

Over the past year, as the share market has fallen, the household saving rate has increased substantially and that more, older workers are either remaining in, or returning to, the workforce.