The Australian housing market is in better condition than many people think according to the Reserve Bank’s head of economic analysis, Anthony Richards in a speech in Sydney yesterday and the bank’s latest financial stability report, also released yesterday.
Mr Richards said the 4% cut in the official cash rate has played a big part in making homes more affordable and in turn that had flowed from the large declines in home mortgage rates.
”It is quite clear that purchase affordability has recently improved very significantly in Australia,” Dr Richards told the fourth annual Housing Congress in Sydney.
”The recent sharp improvement in housing affordability clearly mostly reflects the sharp fall in mortgage rates over the past half year.”
Dr Richards said standard variable housing rates had fallen by about 375 basis points (3.75%) and the average of interest rates paid on all housing loans, including fixed rate loans, had fallen by about 265 basis points (2.65%).
He did warn however that "some of the loans being written now will turn sour”.
"However, overall, I suspect that the risk of non-performing loans increasing to the extent seen in the U.S. is low,” he said.
But even there the figure is still low, much lower than other economies: 0.48% of all home loans retained by the banks are in trouble. That’s around 20,000 people, up 13,000 in the past year, according to the RBA’s Stability Report:
"As at December 2008, non-performing housing loans accounted for 0.48 per cent of Australian banks’ outstanding on-balance sheet housing loans, compared to 0.32 per cent a year earlier.
"Housing loan arrears rates for Australian credit unions and building societies are lower than for banks and are around the same levels as in 2005
"Arrears rates on prime securitised loans have also increased over the year, to stand at 0.73 per cent in December 2008.
“These figures are much lower than in a number of other countries for which comparable data are available, although the Australian experience is broadly equivalent to that in Canada.
"The arrears rate on securitised low-documentation loans (where borrowers can provide less evidence of debt-servicing ability than normal) has increased noticeably over the past year, up 126 basis points to be 2.0 per cent in December.
"For non-conforming loans – made to borrowers with impaired credit histories or who do not otherwise meet the credit standards of traditional lenders – the arrears rate was 9.86 per cent in December, having increased by more than 3 percentage points over the past year.
"It is important to note, however, that non-conforming loans account for only around 0.5 per cent of the total value of outstanding housing loans in Australia, with this share having declined from around 1 per cent over the past couple of years.
"Across all housing loans in Australia, it is estimated that around 20 000 borrowers were 90 or more days behind on their mortgage repayments in December 2008, compared with an estimate of 13 000 the previous December.
"Differences in arrears rates across loan types, arrears rates also reflect differences in credit standards across lenders.
"For example, the arrears rate of full-documentation loans originated by non-bank lenders is higher and has increased by more than that for equivalent loans originated by banks and other ADIs," The RBA said.
In his speech, Mr Richards said potential buyers “need to carefully consider their own circumstances, including whether they would be able to continue to service their loans if mortgage rates were at some point to begin to return to more normal levels,” he told the conference.
"The recent weakness seen in Australian housing prices has been mainly at the higher end of the market. Property prices in more expensive suburbs, which had risen more over the prior few years, have recently fallen noticeably."
"The modest fall in Australian housing prices in 2008 was much smaller than the double-digit falls seen (with some variations across measures) in US and UK house prices.
“Similarly, the falls in housing approvals and in broader measures of economic activity in Australia have been smaller than the declines seen in many other countries.
"Furthermore, there are a number of reasons to think that outcomes here might remain better than elsewhere.
“These relate both to the role of policy in responding to the downturn and the consolidation of household finances that has occurred in Australia since our housing boom slowed earlier in this decade, around the end of 2003.
"It is quite clear that purchase affordability has recently improved very significantly in Australia. Overall, housing prices in Australia softened over 2008 by around 3 per cent.
“There are only very limited data for Australian prices in early 2009, but we have a preliminary gauge of the market in the auction clearance rates for Sydney and Melbourne, which have shown a significant pick-up relative to late 2008."
Mr Richards listed three factors that would support the local housing sector in the downturn.
"First, the recent significant falls in the cash rate are having positive effects on the economy and the household sector, and have contributed to a significant improvement in household cash flows and in measures of housing affordability for people paying mortgages or contemplating home-ownership.
"Second, although homebuilding is likely to remain weak in the near term, there are a number of factors which should support activity over the medium term, providing stimulus to the broader economy.
"Finally, when one looks at the behaviour of the
