Background Notes - Housing Affordability in Australia

Just came across this on the RBA site.

Background Notes for Opening Remarks to Senate Select Committee on
Housing Affordability in Australia
Melbourne – 24 April 2008

http://www.rba.gov.au/PublicationsAndResearch/SubmissionsToParliamentaryCommittees/inquiry_into_housing_affordability_australia.pdf

Geoff

Dear Coffee,

1. Thank you for the interesting article regarding the RBA's views on the existing housing affordability in Australia.

2. The RBA believes that "...most of the increase in house prices ( since the mid 1990s) has been due to increases in the price of land."

3. The RBA actually attributed that low interest rate as well as easy access to cheap funds from overseas capital markets in the mid 1990s-mid 2000s as the 2 key factors largely responsible for the recent housing boom in Australia ( as well as those in the other OECD countries).

4 . The RBA also seems to believe that overall, the existing level of household debts in Australia is still"manageable" with no likelihood of serious mass housing loan defaulting in the near future. This is despite that average Australian household debts has increased significantly over time as compared to average increase in the house hold income over the same period.

5. In particular, the RBA observes that "Despite the sharp fall in traditional measures of housing affordability, arrears rates on housing loans remain low by historical standards". (Point 3, Page 1)

6. It is also interesting to note that RBA's has officially qualified its views regarding "Housing Stress". By the RBA's newly qualification, "only the bottom 40% of the Australian households (earning less than A$80,000 per year) who are spending 30% or more of their household income on servicing their housing mortgage are deemed officiailly to be in "housing stress".

7. Consequently, RBA argues that the number of the Australian households which are presently in "housing stress", are actually much lower than 750,000- 1 millon households projected to be in "severe housing stress", which has been widely reported in the local newspapers recently.

8. As far as the RBA is concerned, the number of Australian households in severe "housing stress" are highly "exaggerated" to a large extent.

http://www.news.com.au/business/money/story/0,25479,23528633-5016113,00.html


9. According to the same a/m Report, the RBA believes that the present home repossession rate in Australia, has also remained historically low at 0.3% against the loans as reflected in ther respective banks' balance sheets. In particular, RBA is saying that:

a. " While (housing loan) arrears rates rose somewhat between 2002 and 2006, they remain relatively low by historical standards, and in fact fell through much of 2007.

b. The arrears rate for loans on banks’ balance sheets is about 0.3 per cent, while that for securitised loans is about 0.6 per cent in total, or 0.4 per cent for prime mortgages.

c. We (the RBA) estimate that there are around 15 000 households in Australia which are 90 days or more in arrears on their housing loan repayments.

d. An additional 30 000 households or so are between 30 days and 90 days in arrears.

These are quite low numbers for a country the size of Australia. " (Page 6 and 7)


10. The RBA further reported that the existing home reposssession rate/number, was reportedly highest in the Western Sydney suburbs across Australia-wide.

11. Consequently, RBA believes that the Western Sydney suburbs have reportedly the highest number of households suffering from severe housing stress as well as having the highest numbers of household with an existing loan in arrears.

12. The RBA further claims that 49 per cent of households with housing debts, in the Canterbury-Bankstown Region in the Western Sydney area, were reportedly paying more than 30 per cent of their income in debt servicing, as compared to 29 per cent for the Australia-wide average households.

13. For your further comments and discussion, please.

14. Thank you.

Cheers,
Kennneth KOH

Basically the RBA believes the housing affordability crisis is a media beat up, and looking at the facts as presented they are correct. People are certainly paying the piper for taking out large mortgages, however in relation to other points in time such as the late 80's they are still ahead in real terms paying a lower portion of their income into their mortgage with loan defaults on the whole trending south.

Because of the increased costs to buy and hold property, and low vacancy rates rents are increasing. This is in line with supply and demand theory. Although the percentage increase in rent is higher than the increases being imposed by the RBA and the banks, in hard earned dollars it is significantly less because rent increases have come from a low base.

On the tenants side there are significantly lower break costs compared to landlords. If the market gets too hot they can gear down by moving to more affordable accommodation, at the worst they may need to ride out six months before they can move on.

Landlords on the other hand can only increase rents at certain intervals, less frequently than interest rates, and they cannot recoup all the costs associated with an interest rate rise. Their break costs are significantly more and if circumstances dictate that they need to get out of the market then they may face the very real prospect of losing money on the deal.

Hopefully the RBA will wait a while to see if the previous rate rises have had the desired effect. They are currently in danger of over shooting their target which would result in a real crisis not just a media beat up.

Regards

Andrew

Bargain Hunter said:

Basically the RBA believes the housing affordability crisis is a media beat up, and looking at the facts as presented they are correct. People are certainly paying the piper for taking out large mortgages, however in relation to other points in time such as the late 80's they are still ahead in real terms paying a lower portion of their income into their mortgage with loan defaults on the whole trending south.

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Actually people are WAY BEHIND in real terms compared to the late 80's. It might be a lower portion of income but it continues at that level for a much longer period of time as inflation is lower now.

yieldmatters said:

Actually people are WAY BEHIND in real terms compared to the late 80's. It might be a lower portion of income but it continues at that level for a much longer period of time as inflation is lower now.

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Dear YM,

1. Are you then saying that in real terms, and with the present high median house price, most of the existing residential properties in Australia, are generally still not " excessively over-valued", reportedly by as high as 20% as previously suggested by Demographia, in terms of the usual housing affordability measures norms?

2. If so, can you please further elaborate on your views with the required supporting data, please.

3. Thank you.

Cheers,
Kenneth KOH

Bargain Hunter said:

Hopefully the RBA will wait a while to see if the previous rate rises have had the desired effect. They are currently in danger of over shooting their target which would result in a real crisis not just a media beat up.

Regards

Andrew

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Dear Andrew,

1. I agree with your concern.

2. This is in view of the ongoing continued higher rates hikes by the commercial banks, increasing housing stress reported Australian-wide, slowing housing markets across Australia wide, lower consumers spending, loss of business conidefence and consumers spending confidence, on-going continued increasingly negative market sentiments and the general slowing down of the Australian Economy within Australia. Externally, the Australian Economy seems to be slowing down too, as adversely impacted by the recent Credit Crunch Crises, the slowing down global economy and the US Recession.

3. This is despite the recent high inflation figures released by ABS, a few days ago.

4. For your further comments and discussion, please.

5. Thank you.



Cheers,
Kenneth KOH

Bargain Hunter said:

Hopefully the RBA will wait a while to see if the previous rate rises have had the desired effect. They are currently in danger of over shooting their target which would result in a real crisis not just a media beat up.

Regards

Andrew

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Dear Andrew,

1. It was reported today over the local "The Australian" newspapers that :

a."The Reserve Bank's interest rate noose has tightened on Melbourne's housing market, cutting almost $40,000 from prices so far in 2008."

b. "According to latest Real Estate Institute of Victoria (REIV) statistics, Melbourne's median house price fell from $472.250 in December to only $432,000 at the end of March, although the average home still costs $54,500 more than in March, 2007. "

c. REIV "...said the overall affect of rising rates on Melbourne house prices should sent a clear message to the Reserve Bank that no more rate rises were necessary. "

d. “It appears the RBA's strategy has had the desired effect on residential property, and any further increases should not be necessary in the short term.”

e. REIV says, "... present conditions pointed to a short-term outlook that was totally different to last year's bullish market. "

http://www.theaustralian.news.com.au/story/0,25197,23597617-20142,00.html



2. Likewise, the Perth property market has similarly been adversely affected in 2008. The same trend seems to be happening in the Brisbane property market now, as far as this discussion thread is developing.
http://www.somersoft.com/forums/showthread.php?t=41300


3. Thus, it would seem that the RBA's successive interest rate increases is already fast slowing down all the various housing markets across Australia-wide, in the absence of a further new interest rate increase by the RBA in May 2008.


4. For your further comments and discussion, please.

5. Thank you.

Cheers,
Kenneth KOH

yieldmatters said:

Actually people are WAY BEHIND in real terms compared to the late 80's. It might be a lower portion of income but it continues at that level for a much longer period of time as inflation is lower now.

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YM,

The rates climbed at an astronomical rate in the 80's and stayed over 14% for almost 5 years (it did dip under this for a short period). The current rises have taken place over the last three years so I do not see how you can claim a longer period of time has elapsed, unless you are ignoring the period rates were over 14% and focusing only on the short term peak of 17%.

The average home owner today is better off than the average home owner in the 80's based on affordability. If the rate continues to climb, this may no longer be true but at this moment in time and taking out the emotion these are the facts.

As treasurer, Keating inherited high rates from Howard, just under 12%. When Howard became PM the rate had come down to under 10%, and the rate continued to fall for the next two years. Was Keating right, was it the recession we had to have?

Whether raising and lowering interest rates to keep cpi within a narrow band is any better than allowing the market to self correct I cannot be sure. But the fact is we don't seem to be able to avoid pain if we want to see gain.

Regards

Andrew

Bargain Hunter said:

Whether raising and lowering interest rates to keep cpi within a narrow band is any better than allowing the market to self correct I cannot be sure. But the fact is we don't seem to be able to avoid pain if we want to see gain.

Regards

Andrew

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Dear Andrew,

1. The alternative is to review the continued "relevancy" for the present 2%-3% inflation targetting rate, which is used by the RBA to "manage" the Australian Economy, in today's fast changing economic context facing Australia whereby much of the existing inflation is reportedly believed to be largely imported from overseas, rather than due to the continued domestic "unsatiable" demand and "non-sustainable" local consumer spending, despite the past 8 successive interest rate increases over the last 3 years.

2. Both Mr. Bernie Fraser and Professor Bob Gregory who have previously served on the RBA Reserve Board, in the past, are both advocating this alternative view.

http://www.theaustralian.news.com.au/story/0,25197,23600365-2702,00.html

3. Both Mr Fraser and Professor Gregory further believe that the present RBA is offering no real solution to contain the existing high inflation rate in Australia, by increasing its interest rate continually, (as it is largely imported from overseas) and that in fact, Glenn Stevens and his present RBA risk "stalling" the Australian Economy into a possible recession un-neccesarily, in the near future, if it were to keep increasing its interest rate to an un-acceptably high level.

4. Consequently, will Glenn Stevens and his RBA Board of Governors as well as Wayne Swan and his team of policy-makers in the Australian Federal Treasury have the wisdom and moral courage to pay heed to this public feedback and suggestion so as to "timely" review the existing montary policies for Australia and to re-cast them where neccesary, in view of the prevailing "two-speed" Australian Economy as well as the "2-speed" global economy with the US and UK/Europe nearing falling into a Recession and with India and China trying their best to control their "break-a-away" high inflation rate.


5. For your further comments and discussion, please.

6. Thank you

Cheers,
Kenneth KOH

Kennethkohsg said:

Dear Andrew,

1. The alternative is to review the continued "relevancy" for the present 2%-3% inflation targetting rate, which is used by the RBA to "manage" the Australian Economy, in today's fast changing economic context facing Australia whereby much of the existing inflation is reportedly believed to be largely imported from overseas, rather than due to the continued domestic "unsatiable" demand and "non-sustainable" local consumer spending, despite the past 8 successive interest rate increases over the last 3 years.

2. Both Mr. Bernie Fraser and Professor Bob Gregory who have previously served on the RBA Reserve Board, in the past, are both advocating this alternative view.

Cheers,
Kenneth KOH

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Hi Kenneth,

It is not the first time I have heard this idea floated.

The current target rate was set by the Howard Government, prior to this the RBA had used a rule of thumb to determine when to adjust the interest rates. The rate was set at a time when the economy was fairly stable having come back from the recession of the late 80's, and would have been based I guess on what were considered strong domestic indicators of the time.

The Australian economic landscape has changed, we are a less insular economy, the previously dormant economies of India and China are now growing expedentially and we are well placed to service their needs, the international subprime debacle, the increased costs of oil these are factors beyond our borders which greatly impact our own economic performance.

Add to this the matter of inequality between the states. While the Eastern States take the brunt of the belt tightening due to fairly stagnant wages other states are going gangbusters. The states experience little growth are likely to come to a halt before too many more rate rises take effect if at all
against the strong resources boom.

Perhaps the cpi target rate needs to be reviewed, but who's decision is this anyway? The RBA is supposed to be independent, yet the rate they monitor was set by a previous government.

Does the current Government have the right to interfere? It would certainly be a vote winner.

Does the RBA have the power to change the rate? Considering his track record for passing his decision making onto the banks, Glenn Stevens is not the man. http://www.theaustralian.news.com.au/story/0,25197,23494251-7583,00.html

And even if the rate can be changed, what would the new rate be and what economic indicators would determine when the rate would need to be readjusted?

The experts in your article raise interesting points but do not commit to a magic figure or a course of action.

Regards

Andrew

Bargain Hunter said:

Hi Kenneth,

It is not the first time I have heard this idea floated.

And even if the rate can be changed, what would the new rate be and what economic indicators would determine when the rate would need to be readjusted?

The experts in your article raise interesting points but do not commit to a magic figure or a course of action.

Regards

Andrew

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Dear Andrew,

1. I personally wonder what Glenn Stevens and his RBA Board of Governors are presently thinking, in respect to this suggestion?

2. As you have previously agreed with me that much of the existing inflation figures are externally imported into Australia, thus I see that there is no need to prescribe any specific recommended figures in advance, at this point in time;- other than the fact that the present RBA as headed by Glenn Stevens, is both openly willing and prepared to take a hard "re-look" and review on its own 2%-3% inflation target in conjunction with the Wayne Swan and his team of policy makers at the Australian Treasury, as well as to re-examine the relevancy and continued feasbility of setting pre-agreed inflation targets to co-ordinate and manage the Australian Economy as an independant RBA, amidst a highly volatile global financial situation, moving along a "dual-speed" economic basis.

3. This is especially so when the Australia Economy is highly "dynamic" and subject to constant changes both externally from the wider global financial situation as well as internally, due to its present slowing down Australian Economy and slowing domestic demand and lower consumer spending levels that is being reported recently.

4. Morever, it is no longer the job for Mr Bernie Fraser and Professor Bob Gregory to do so, as they are no longer serving on the present RBA Board of Governors. To do so, is to "insult" the present RBA, as headed by Glenn Stevens, for their lack of professionalism in their proper management of the Australian Economy.

5. For your further comments and discussion,please.

6. Thank you.

Cheers,
Kenneth KOH

Bargain Hunter said:

Hi Kenneth,

Perhaps the cpi target rate needs to be reviewed, but who's decision is this anyway? The RBA is supposed to be independent, yet the rate they monitor was set by a previous government.

Does the current Government have the right to interfere? It would certainly be a vote winner.

Does the RBA have the power to change the rate? Considering his track record for passing his decision making onto the banks, Glenn Stevens is not the man. http://www.theaustralian.news.com.au/story/0,25197,23494251-7583,00.html

And even if the rate can be changed, what would the new rate be and what economic indicators would determine when the rate would need to be readjusted?

Regards

Andrew

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Dear Andrew,

Interesting comments, indeed!

Cheers,
Kenneth KOH

Dear Andrew,

1. In the words of Alan Wood, Economics Editor of "The Australian" Newspapers in his recent article, entitled, "Higher Rates From Broader Objectives",

"AUSTRALIA'S monetary policy has arrived at a critical point, and how the Reserve Bank handles it will have profound long-term consequences for the economy and the central bank itself, indeed for all of us. "

http://www.theaustralian.news.com.au/story/0,25197,23599404-20142,00.html



2. In the same article, Alan argues that further interest rate increases by the RBA may not be required at this point in time, given that ANZ, NAB and Westpac has all gone ahead to increase their housing loan interest rate, ahead of the RBA's May 2008 Board Meeting to decide on the next interest rate movement outcome.

3. Alan Wood further suggests that "In current circumstances, it means inflation can be allowed to run over the top of the target band for some time to cover the transition from one price level to a new, higher one."

"What the RBA has to decide is how much of an overrun it will tolerate and for how long."

4. However, "It does not mean the target band should be widened or that monetary targeting is no longer viable."

5. In conclusion, Alan Wood claims that:

"To preserve policy credibility, Stevens will need clear evidence the economy is decelerating and demand will fall enough to bring inflation back to about 2.5 per cent over time."

"If demand and inflation pressures start to rise, then interest rates will have to go up."

" However, the combination of official rate rises and the rise in rates by the banks has significantly tightened policy, with more rises in bank lending rates likely, so this (further increase in the RBA's interest rate) may not be necessary."

6. For your further comments and discussion, please.

7. Thank you.

Cheers,
Kenneth KOH

Kennethkohsg said:

3. Alan Wood further suggests that "In current circumstances, it means inflation can be allowed to run over the top of the target band for some time to cover the transition from one price level to a new, higher one."

"What the RBA has to decide is how much of an overrun it will tolerate and for how long."

4. However, "It does not mean the target band should be widened or that monetary targeting is no longer viable."

Cheers,
Kenneth KOH

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Wayne: So in conclusion Alan, you agree to a widening of the band but not as official policy

Alan: Yes, minister.

Bargain Hunter said:

Wayne: So in conclusion Alan, you agree to a widening of the band but not as official policy

Alan: Yes, minister.

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Dear Andrew,

I've thought that the "correct" key critical question that Wayne Swan should "ask" (or/and rather "guide" the RBA) in this case , if the present RBA headed by Glenn Stevens, presently do not have the answer at this point in time, with regards to the following statement made:

"What the RBA has to decide is how much of an overrun it will tolerate and for how long." instead?

Cheers,
Kenneth KOH

Dear Kenneth,

I was having a play on an old British comedy where the minister is continually bamboozled by the double talk of his advisers such as....

http://www.youtube.com/watch?v=_pxeRT8pcTo

Bargain Hunter said:

Dear Kenneth,

I was having a play on an old British comedy where the minister is continually bamboozled by the double talk of his advisers such as....

http://www.youtube.com/watch?v=_pxeRT8pcTo

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Dear Andrew,

1. I think so too when I first saw your post and wanted to have a laugh myself.

2, However, on second thoughts, as the issue discussed is critical enough for me to re-highlight it out for further discussion, please.

3. Thank you.

Cheers,
Kenneth KOH

Hi All
1. Although I agree with most of the factors contributing the inflation, I believe another very important factor is GREED.
2. Everyone said fuel prices caused the inflation. Who makes the most? - the oil company? Woodside reported has 48% increase in the first quarter.
3. We live in a society of greed. We see KMart etc cutting price every week - cut at the RRP. Who sets the RRP? If they bought at $2 but taged RRP $8, then "discount" by 25% - you still pay $6.
4. WA set up the fuel watch now is adopted nationally. Woolwoths said since the introduction of FUELWATCH they had the best profit. ACCC is now asking Woolworth to explain - HOW? It simply every one knows how to profit by raising prices. Nobody would drive 10km away to get a 5cents cheaper price. Only the labor government would think it is a good idea.
5. Banks have no reasons to increase the rate. Simply they could not make enough money from other business. Mortage is a big area (big base), a rise of 0.2% would make them a lot more profit. Since labour came in power, the banks have rasied rates independtantly few times.
6. The labour government is losing control I believe. We may see 17% rate on the road

TheAnalyst said:

Hi All
1. Although I agree with most of the factors contributing the inflation, I believe another very important factor is GREED.

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And the opposite to greedy capitalists, is communism, and we already know that communism doesn't work.

If oil prices drop, so will inflation. Simple as that.


I've always blamed Woolworths and Coles and their supermarket duopoly for higher food prices, but a report out yesterday on bush ABC radio said that every town without a Woolworths or Coles, had 20% higher food prices than those that had one of the two. Not sure if the results were corrected to town size, as that would influence the results.

See ya's.

Topcroper

You did not comment on anything about what I said that GREED is an very important factor which contributes to the inflation. Nothing to do with Communism or capitalism. In communisit China, Russia (back soon) etc a lot of people are more greedier.