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Macrobusiness: RBA expecting a property correction and here comes the WHY

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The RBA is expecting a property correction

 
 

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Cross-posted from Martin North’s DFA blog.

In an address yesterday to the CITI Residential Housing Conference in Sydney, Luci Ellis, Head of Financial Stability Department at the Reserve Bank spoke about housing in the context of the financial system. Quite a bit of the speech covered aspects of relative population density, demand and supply. However, to towards the end of the speech, she spoke more broadly. I highlight some of the statements in bold.

“Our low-density cities have developed out of a postwar vision of Australian cities, of detached houses on quarter-acre blocks. State and Federal War Service Homes programs were designed on that vision; planning regulation enforced it. As a mode of living, low-density suburbia has its advantages. But it does mean that distances are greater and almost every trip requires a car. The only alternative offered at the time of our first mass suburbanisation seemed to be the ‘tower in the park’, Le Corbusier’s utopian dream of apartment living. But the reality turned out to be a nightmare of social isolation for the public housing tenants in those developments.

Let me be clear that I am not saying that the low-density, detached housing option should be phased out. It is the preferred choice of many households, but it is not for everyone. In the end, the aim should be to provide better choices, and a wider range of choices. I’m hopeful that the future brings Australians a wider range of places they would be happy to move to; different housing types for different family sizes and life stages; and a greater confidence that centres outside state capitals can offer the strong job markets and scope for entrepreneurship people need, and housing at a price they can better afford. That way, people can see an upswing in housing prices in the larger centres and say, ‘I don’t have to buy into that. I don’t have to stretch my finances’. Australian household finances are not looking that stretched at the moment, and we’d like to see it stay that way.

As we have said many times in the past, the 15 years or so to about 2005 saw housing prices rise noticeably faster than incomes. This was in large part a transition to a new equilibrium of lower inflation and interest rates, and thus higher debt and housing prices relative to incomes. That transition is over now. Housing prices are therefore going to be cycling around a slower trend than they did in the past. There will be more periods where prices are falling a little in absolute terms.

At an individual level, this means that there is less scope for rising markets to cover over your mistake if you fall in love with a property and overpay for it. At an aggregate level, it means there is little room for another round of property exuberance of the type we saw just over a decade ago, in 2002 and 2003. Australia managed to have its housing boom end without a major disaster. Plenty of other countries weren’t so lucky. Usually it’s the property developers that are the source of loan defaults and financial instability, not the households with mortgages. But an overstretched household sector is hardly a good environment to have if something should go wrong elsewhere in the economy.

That is why the Reserve Bank and the Australian Prudential Regulation Authority (APRA) have emphasised loan serviceability so much of late. Lenders have become more sophisticated in the ways they assess households’ capacity to repay mortgage loans. Most of them have moved beyond a crude approach of applying a blanket repayment-to-income test (APRA 2013). They are now more likely to take people’s actual living expenses into account, not just some version of the Henderson Poverty Line. After all, it doesn’t seem reasonable to expect people to have a poverty-level lifestyle to pay off a million-dollar home.

KEEP READ MORE HERE - excellent article by Martin North

http://www.macrobusiness.com.au/2014/05/the-rba-is-expecting-a-property-correction/?utm_medium=email&utm_campaign=Daily+MacroBusiness&utm_content=Daily+MacroBusiness+CID_b24305f921e14dc2d1c47857e11e9f91&utm_source=Email+marketing+software&utm_term=The+RBA+is+expecting+a+property+correction

 

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Guest Thursday, 16 July 2020