It is always good to get some expert insights into the residential property sector – particularly at present, with so many claims floating around about the current state and future of domestic and international economic conditions. To this end, I've decided to share the following article which appeared in the August edition of Century 21 Wentworth's Property Investor.
RBA: the purported Housing Bubble, Australia's economy and China
The Governor of the Reserve Bank of Australia, Glenn Stevens, recently delivered a speech at a charity luncheon in Sydney that provided some telling commentary for Australian property investors.
A highly respected figure that is watched closely by markets due to his unique economic insights and influence over the economy and property market, the Governor provided his view on the controversial "housing market bubble" theory, the health of the Australian economy and the moderation in Chinese economic growth of late.
The speech makes interesting reading for property owners and investors who are concerned about current dwelling value prices and the likelihood of an imminent drop, and those interested in the health and future prospects for the Australian economy.
The Housing Market Bubble
Many market commentators have been concerned about the perceived high dwelling values in Australia. Glenn Stevens explained that two key elements of this assertion are that prices relative to income are much higher than they were 15-20 years ago, and that Australia's dwelling values seem high compared to other countries.
Without dismissing that prices can fall and have fallen in the past, Glenn Stevens questioned the first claim, stating that there is no particular basis to think that the price to income ratio 20 years ago was 'correct'.
The Governor went on to comment about Australia's apparent high dwelling prices compared to the rest of the world: "The point is simply that historical or international comparisons, to the extent they can be made, do not constitute definitive evidence of an imminent slump. At the very least, the complexity of making these comparisons suggests we ought to look at some other metrics in thinking about the housing market."
Glenn Stevens continued by outlining how mortgage arrears remain low and have been falling over the past year, which is likely in response to debt servicing burdens declining.
"As a result of lower house prices and therefore lower loan sizes, somewhat lower interest rates and a good deal of income growth, the repayment on a new loan on a median-priced house as a share of average income is now at its lowest for a decade (except for the 'emergency' interest rate period in 2009)."
The Governor went on to conclude, "We should never say a crash couldn't happen here, and the Reserve Bank continues to monitor property markets and the performance of mortgages quite closely, as we have for many years. But it has to be said that the housing market bubble, if that's what it is, seems to be taking quite a long time to pop - if that's what it is going to do. The ingredients we would look for as signalling an imminent crash seem, if anything, less in evidence now than five years ago."
Australia and the China Story
During his address, Glenn Stevens painted a fairly positive picture of the Australian economy and its recent resilience to international shocks. That being said, Australia's growth is heavily coupled with China and recent slowing in that economy has made many Australians concerned.
Far from panicking about slowing Chinese GDP growth, the Reserve Bank Governor seemed to be thankful for the current period of moderate growth:
"The data are quite consistent with Chinese growth in industrial output of something like 10 per cent, and GDP growth in the 7 to 8 per cent range," said Glenn Stevens.
"To be sure, that is a significant moderation from the growth in GDP of 10 per cent or more that we have often seen in China in the past five to seven years. But not even China can grow that fast indefinitely and there were clearly problems building from that earlier breakneck pace of growth. Inflation rose, there was overheating in property markets and no doubt a good deal of poor lending. It is far better, in fact, that the moderation occur, if that increases the sustainability of future expansion."
The Governor then went on to suggest that the China Story is "roughly on course" and that it is likely fortunate that Australia is more exposed to China, than say Europe, which has a very low average growth rate.
While clearly outlining some of the challenges that Australia is currently facing, the title of Glenn Stevens' speech seems to best summarise his views on Australia - "The Lucky Country".
Governor Stevens' address was given to The Anika Foundation Luncheon in Sydney on July 24, 2012.
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