27 August 2009
Australian Housing Market - still on a winner
Recently Reserve Bank Governor Glenn Stevens wrote: "the present ... setting of monetary policy is appropriate..."
For the past many months the Reserve has been indicating a rate cut due to the more favourable inflation figures. With rates remaining unchanged, it seems that they are happy to stay put for a while longer.
With most other countries' rates so much lower, why are Australia's interest rates now stuck higher than anyone else's in the world, apart from China, India and Brazil?
Many say that it is due to the resources needs of China, others say that maybe the government stimulus has been the reason (remember that most world economies received a stimulus package from their government). One clear point of difference in Australia is that our housing prices have not fallen to the same extent as overseas countries, where many are still on the decline. In fact according to the ABS, they are rising - a 4.2 per cent rise in the June Quarter.
Although most Australians have seen their superannuation figures plummet and share portfolios savaged like all other economies, the big difference is house prices - mainly because Australians just cannot walk away from their mortgages, according to Harvard Professor Nouriel Roubini, the man who is credited with predicting the GFC.
According to a Westpac-Melbourne Institute survey recently released, more than 65 per cent of consumers expect house prices, which have been declining gradually for much of the 2008 year, to stabilise or begin to rise in the next 12 months.
Combined with mounting evidence that low interest rates and the federal government's boost to the first-home owners grant are set to drive a recovery in housing construction, the survey results suggest a degree of confidence that the nation's property market will escape the worst global economic meltdown in more than 60 years relatively unscathed.
So far private-sector surveys indicate that price falls have been limited to 3 to 4 per cent, while the Australian Bureau of Statistics says they dropped by more than 2 per cent in the March quarter to be almost 7 per cent from the peak reached in the same period last year.
Reserve Bank of Australia governor Glenn Stevens says there is reason to think the property bubble that developed early this decade is deflating without major fallout for the economy.
"The ratio of the median dwelling price to average household income has declined quite noticeably since 2003 without a very large absolute decline in house prices," he said recently. "This is evidence for at least the possibility that these adjustments can take place over reasonably lengthy periods and without being terribly disruptive to the economy."
Losses in Australia have been relatively mild compared with falls of close to 20 per cent in the United States and Britain.
Some would suggest this is a double edged sword - house prices stay strong, but the cost of getting into the market is too high. According to figures from AFG, the average new mortgage lodged with in Australia rose to $354,137 in July which was a new record, beating the pre-Lehman Bros record set in October 2008.
The chart below shows an interesting historical snapshot of average weekly ordinary times earnings (annualised) to purchase a house in Australia's capital cities, which highlights this point.
Click to enlarge
One of the winners seems to be property Investors, who are discovering that credit is available for housing and so have returned to the market as they continue to monitor the stock markets.
So it appears the economy is doing better than we thought it could this time last year...go the little Aussie battler.