Australia’s falling house prices are manageable and unlikely to derail the country’s growing economy, the Reserve Bank boss says.
In fact, falling prices would make property more affordable, said RBA governor Philip Lowe in a speech on Wednesday morning.
Echoing an RBA report released last year, Mr Lowe pointed the finger at “inflexibility” of housing supply “in response to large shifts in population growth” for causing falling prices, rather than higher interest rates or rising unemployment, as had been the case in past declines.
He said the slow response to the population boom was worst in Western Australia and NSW.
“Australia’s population growth picked up noticeably in the mid-2000s and it took the better part of a decade for the rate of home building to respond,” Mr Lowe said.
“It took time to plan, to obtain council approvals, to arrange finance and to build the new homes. Not surprisingly, housing prices went up.”
He said enough homes were eventually built with the number of dwellings increasing at the fastest rate in more than two decades.
“Again, not surprisingly, prices have responded to this extra supply.”
He also noted the RBA’s talks with the banks found that, on average, the maximum loan size offered to new borrowers had fallen about 20 per cent since 2015 and only 10 per cent of people borrowed the maximum they were offered.
Mr Lowe said discussions with the banks found that application approval rates remained largely unchanged.
“The main story, though, is one of reduced demand for credit rather than reduced supply,” he said.
Mr Lowe said investors, both domestic and foreign, had a part to play in fuelling rising house prices.
At the peak of the boom, approvals to investors in NSW accounted for half of approvals nationwide, he said.
“In the middle years of this decade, there was a surge in foreign investment in residential property, particularly from China,” he said. “More recently, this source of demand has waned, partly as a result of the increased difficulty of moving money out of China as the authorities manage capital flows.”
This shift in foreign investor demand coincided with a change in sentiment from investors at home too, he said.
In the current economic climate, only a tightening labour market and an increase in wages would counterbalance falling house prices, he said.
“Taking these various considerations into account, the adjustment in our housing market is manageable for the overall economy,” he said.
“It is unlikely to derail our economic expansion. It will also have some positive side-effects by making housing more affordable for many people.”
Mr Lowe said people could usually service their loans in periods of both low unemployment and interest rates, even if their household finances were “sometimes strained” because of weak income growth.
“Our estimate is that currently, less than 5 per cent of indebted owner-occupier households have negative equity, and the vast bulk of these households continue to meet their mortgage obligations,” he said, adding that one factor that had helped was a substantial decline in the number of new loans with high loan-to-valuation ratios.
“The nature of Australian mortgages – in which there is an incentive to make prepayments – has also helped.”
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