RBA on affordability

The Age 25 Nov 2009
http://www.theage.com.au/business/we-can-pay-more-for-homes-rba-20091125-jp4z.html

" RBA deputy governor Ric Battellino said that Australian households appeared to have the capacity "to sustain a relatively high ratio of housing prices to income"

and
"On plausible assumptions, the deposit needed by first-home owners may now be around one and a quarter years' income, almost twice what it was 15 years ago."

The proportion of people who owned their homes outright has fallen from 42 per cent in 1994-95 to 33 per cent in 2007-08, the Australian Bureau of Statistics said this month, while the amount owing on homes had doubled to $150,000 and the median home value had doubled to about $400,000.
 
Hi Julie,

That's good news! We've known for a while this is the case, but it might mean that the RBA is signalling that they're in no rush to raise rates to head off house price appreciation.

Here's some earlier insight from the RBA into just why houses are still very affordable in Australia:

Conditions and Prospects in the Housing Sector

If you haven't read the linked review as yet then you really shouldn't be investing in residential property in Australia. This is a blow by blow breakdown of all the drivers of affordability and price for your preferred asset category.

Cheers,
Michael
 
i saw it the other way Michael - if they can afford higher prices then they can afford higher rates.

wealth confiscation - don't put your money into your home, pay us more interest.

still, i still call the last few rises a stern shot across the bow with a big shell.
 
Battellino made it also on bloomberg
My view is that I don't think RBA and Stevens would fully agree on what he said. After all the only reason behind rate rise is the growth on credit on housing, if the housing credit pose no danger RBA wouldn't rise rates as business credit is contracting.
My view on battellino is that he is an idiot, love the bloomberg quote:
“It is now 18 years since Australia has experienced a negative in year-ended gross domestic product growth, a very prolonged expansion,” he said. “With the economy having only recently entered a new upswing, it is reasonable to assume that we will see this growth extended for a few more years yet.”
I can see his deep fundamental analyisis: things are going well: reasonable to assume things will go well for years to come, may be he also mean: share market goes up more reasonable to assume will go up for years to come, wonder if he believes: economy going bad: reasonable to assume will go bad for years to come, or share market going down: reasonable to assume will go down for years to come.
Likely RBA is more in G.Stevens hands...;)
 
My view on battellino is that he is an idiot

Seems like I am not the only one having bad opinion on Battellino, here is another recent updata from bloomberg:
The Australian dollar was the biggest gainer against the dollar after Battellino of the RBA told a conference in Melbourne today that with the economy having only recently entered a new upswing, “it is reasonable to assume that we will see this growth extended for a few more years yet.”

‘Pretty Optimistic’

“The idea that the central bank can say the economy has entered a new upswing which could last for a few more years is pretty optimistic,” said Robert Rennie, head of currency research at Westpac Banking Corp. in Sydney. “There’s a fairly strong and consistent message coming from the RBA. We expect them to raise 25 basis points next week.”
May be Rober Rennie from Westpac had a more "polite" way to call Battellino an idiot...:rolleyes:
 
The report that MichaelW linked to isn't entirely bullish. As with any central bank commentary it can be taken to mean to support different viewpoints.

Three things in particular struck me.

The first is the graph of interest payments relative to income.

260309_so_graph5.gif


The emergency rate cuts have eased the pressure on heavily indebted households. But even so, the percentage of income being spent on servicing debts is higher than the long term average. And things will get worse as rates rise.

The second is that it's the first time buyers who are struggling the most. They now (on average) have to save sixteen months of income for a deposit, though I don't recall seeing if this is gross or net.

There was a report posted here a few weeks ago that first home buyers aren't mortgaging themselves up to the hilt, which is good, but it also indicates that there's a ceiling as to how high prices can rise relative to incomes.

The third item was that the housing shortage might be less severe than is claimed. Given the central argument for continued above inflation rises in house prices is that there's a massive undersupply, this is an important point.

My opinion?

I think that the main point is that Battellino is saying that all is well. Australia isn't facing economic ruin from a housing implosion. And whilst high prices might not be desirable, they're sustainable.

In terms of policy decisions, central banks are starting to look at moving from simply targeting headline inflation to also taking into account asset price inflation. So I suspect that the RBA is going to look at controlling house prices, and possibly even constrain growth to below inflation rises, which would slowly improve things for FHBs.

If I'm correct in my assessment, and the RBA can finesse things properly, then I suspect that it's going to change investment strategies as rapid capital gains will be very unlikely.
 
The emergency rate cuts have eased the pressure on heavily indebted households. But even so, the percentage of income being spent on servicing debts is higher than the long term average. And things will get worse as rates rise.

it also clearly shows that a small rate rise can have a massive effect - so ther'e no need to look towards 10% SVR.
 
I'm in agreement with you there Blue Card.

Mervyn King (the head of the Bank of England) believes that monetary policy should be as boring as possible. If it becomes unpredictable then the central bank has lost control.

So I wouldn't expect very high interest rates anytime soon. My best guess would be a touch lower than they were before the Global Financial Crisis, but a lot depends on the state of the economy.

The other thing that I suspect that the bank is trying to control the economy through hinting at its policy. For example, threatening to intervene in the housing market by raising rates might well be sufficient to cool it (OK, that didn't work in the UK...), without having to act.
 
Graemsay,

A couple of great posts. Well researched, well considered and well constructed responses. Up your post count mate, your contributions are great! :D

Kudos.

Cheers,
Michael
 
it also clearly shows that a small rate rise can have a massive effect - so ther'e no need to look towards 10% SVR.

We have to consider RBA doesn't have power to set rates of medium/long term, they do chave control for variable rate and probably up to 1 year term.
Also if in the medium/long term inflation and CPI rise above RBA interest rates rates would have to rise much higher then everyone expect today.
I don't think in the long term this scenario is remote as we all see how Australia is vulnerable to commodity prices and the AU$ can be very weak importing a lot of inflation with it. The way I see it is higher will go now and lower will go later, and same thing about the economy. You just can't outpace the growth in productivity forever
 
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