Business Spectator Home Page

As always, Glenn Stevens has made several interesting remarks on housing in his speech today. This will inevitably trigger a lot of uninformed comment. So let’s consider what the governor actually said:

“The decline in interest rates, together with the additional grants for first-home buyers, has seen a significant pick-up in demand for housing finance. The value of loan approvals has risen by about a third since the low point in the middle of 2008. In contrast to developments in so many other countries, house prices are tending, if anything, to rise, and arrears rates on the bulk of mortgages remain very low by historical and international standards. In fact, across some portfolios arrears rates have declined in recent months.”

Okay, so the key here is that Glenn has noted that house prices are trending slowly up (not down) as readers here would know and, critically, that mortgage default rates are low (relatively and historically) and possibly even declining, notwithstanding much higher levels of unemployment. All good despite the fact that rising prices and low default rates are bizarrely contested by some protagonists.

He then argues that “…the prominence of household demand in driving the expansion from the mid 1990s to the mid 2000s should not be expected to recur in the next upswing. The rise in household leverage, the much lower rate of saving out of current income, and the rise in asset values we saw since the mid 1990s, are far more likely to have been features of a one-time adjustment…than of a permanent trend. Moreover the risks associated with those trends going too far are apparent from events in other countries. These risks have been reasonably contained so far in Australia – but it would be prudent not to push our luck here.”

Glenn is basically saying don’t expect to see super-high, double-digit asset price growth in the next upturn due to new restrictions on the flexibility of credit and the far greater conservatism in lending standards as a result of the GFC. Interestingly, these points would seem to apply with most force to equities markets (including listed property, private equity and hedge funds), which have been more adversely affected by credit rationing, than, say, housing.

His next paragraph is likely to attract the most attention. In short, Glenn notes, quite reasonably, that we need to ensure that housing supply responds adequately to changes in housing demand – as I’ve observed here relentlessly – given the acute housing shortages that exist in Australia (it never ceases to surprise that these shortages are refuted by some). More specifically, he comments that we want to avoid a “major run up in prices” or a repeat, I presume, of the extremely high growth rates seen in places like Perth. These are all good points that I have reiterated for years:

“A very real challenge in the near term is the following: how to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices. Given the circumstances – the economy moving to a position of less than full employment, with labour shortages lessening and reduced pressure on prices for raw material inputs – this ought to be the time when we can add to the dwelling stock without a major run-up in prices. If we fail to do that – if all we end up with is higher prices and not many more dwellings – then it will be very disappointing, indeed quite disturbing. Not only would it confirm that there are serious supply-side impediments to producing one of the things that previous generations of Australians have taken for granted, namely affordable shelter, it would also pose elevated risks of problems of over-leverage and asset price deflation down the track.”

Note here that these comments need to be juxtaposed against recent observations from the RBA’s Tony Richards and Ric Battellino that (a) Australian house price growth has been very low since the end of the last boom in 2003 (notably less than household disposable income growth and nominal GDP), and (b) that our boom ended in 2003, which was several years ahead of the US and UK.

In summary, the governor appears to be offering up the following remarks:

1) Australian house prices are trending up not down, unlike their peers overseas with the risks to this market “reasonably contained” (but let’s not lose sight of those risks);

2) More austere lending standards should help us avoid super-normal rates of growth going forward;

3) That house price growth will ideally translate into a response in the form of higher housing supply;

4) If supply does not respond, policymakers have a problem and need to remove the well-documented supply-side impediments.

For the avoidance of doubt, at no point does the governor insinuate that Australia is suffering from a housing bubble. Indeed, his colleagues have bent over backwards in countless speeches over the last two years highlighting the resilience and integrity of this market. And they have been proven right with the passage of time. Moreover, I am fairly confident that the RBA is very happy to see prices rising modestly.