Housing affordability - still favourable according to RBA

Wed, 01 Mar 2017  |  

This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/798497-220715204.html

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Housing affordability - still favourable according to the RBA

The housing affordability issue remains a hot-button point in Australia with prices rising at a solid pace.

This rise in prices has created a perception that housing is getting further out of reach for many, especially first home buyers, as the amount of money that needs to be borrowed to buy a house continues to increases at a pace about incomes.

And that is patently true. In the last year alone, house prices are up around 10 per cent, while incomes are up around 2 per cent.

But the measure of housing affordability that looks solely on house prices and incomes hides a vital element – namely, interest rates. It almost goes without saying that the interest rates paid on a mortgage will fundamentally determine the affordability of that loan and therefore that house.

Paying 4.5 per cent, as is commonly available for a standard mortgage now, it a lot easier – that is affordable – compared with the same loan charging a 9 per cent interest rate, by way of example.

It is why the Reserve Bank of Australia (and other competent analysts) factor in interest rate when they assess comprehensive measures of affordability. Indeed, numerous RBA research articles of the topic forcefully conclude that the structural lowering of interest rates from the late 1980s has been a vital influence on the rise in house prices but has not significantly impacted affordability.

Unpublished data RBA show a measure of affordability that includes not only house prices and incomes, but also the level of interest rates. The chart of that data, reproduced in the above link, shows the proportion of a household’s income needed to service a loan on an average house with an 80 per cent loan to valuation ratio with a standard variable mortgage over 25 years.

There are a number of standout issues with these findings.

Perhaps most notably is the point that over the past 35 years, the proportion of an average household income devoted to servicing an average mortgage has fluctuated between 20 and 30 per cent and has averaged around 23 per cent. The current ratio is 24 per cent.

In other words, housing affordability right now is close to the long run average and well below earlier peaks. To be sure, it is above the levels on the earlier to mid 1980s and again in the period from the mid-1990s to the mid-2000s, but it is well below the level of the late 1980s and the period around 2005 to 2012.

The interplay of house prices, incomes and interest rates over 35 years has created the environment of broadly steady affordability. If it wasn’t high interest rates that was the burden (the 1980s), it was high unemployment (the 1980s and 1990s) or high house prices (now).

And of course there will always be some areas where prices are out of kilter with the national averages which allows for some people to grandstand about how tough it is to buy a house in these over inflated markets. Fair enough for Sydney and Melbourne at the moment. But rarely do we hear about the myriad of examples of extremely favourable affordability such as in Perth, Adelaide, Hobart, Darwin and a range of regional cities and towns.

For those wishing for falling house prices so they might be able to buy into the Sydney or Melbourne markets, there is a fundamental flaw in their thinking. Price are unlikely to fall unless there is a significant change in interest rates or household incomes.

What if the fall in house prices being wished for by some was due to interest rates being hiked so that mortgage rates were 8 or 9 per cent? What if prices fell because the unemployment rate went to 8 or 9 per cent?

It is likely that is when the complaints would turn to interest rates and unemployment and that the government needed to do something about it even though prices are lower.

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Why are Bill Shorten and Labor scared to run on the economy?

Tue, 21 Mar 2017

This article first appeared on The Guardian website at this link: https://www.theguardian.com/australia-news/2017/mar/16/why-are-bill-shorten-and-labor-scared-to-run-on-the-economy 

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Why are Bill Shorten and Labor scared to run on the economy?

The dust is settling from the Western Australian election and there are some implications for the way the federal Labor party should conduct itself from now until the next election if it is to enhance its chances of winning.

For the Liberal party, the lessons are clear. It might sound trite to mention it but its electoral success will depend almost exclusively on its ability to deliver materially better economic conditions between now and election day.

For Labor, the task is easier. It needs to take the initiative on the economy, economic policy, the budget deficit and government debt and highlight how poor the Coalition has been in most aspects of economic managements since the 2013 election.

In those three-and-a-half years of the Coalition being in charge of the economy and budget, growth has been sluggish despite favourable conditions in Australia’s major trading partners. The Australian economy should be stronger because of the welcome news of the Australian dollar falling sharply in recent years, which has provided a boost to domestic economic conditions. What’s more, interest rates have been cut to record lows, yet the economy has been struggling to register annual GDP growth near 2.5%, the unemployment rate is the same as when the Coalition won the 2013 election, wages growth has plummeted to a record low, and the government debt has grown significantly faster than during the previous Labor government, which of course included the fiscal stimulus measures that kept Australia out of recession.

Ever since the mid-1990s, the Labor party has been reluctant to run hard on issues to do with the economy. For some reason, it is riddled with self-doubt that stems, it appears, from the high interest rates of the late 1980s and early 1990s, and its proactive use of budget debts and moderate debt accumulation during the global crisis to ensure Australia kept growing and to protect an estimated 200,000 jobs.

A $2 billion national building snow job

Sat, 18 Mar 2017

Prime Minister Malcolm Turnbull reckons his Snowy Hydro $2 billion investment is a “nation building project”.

Yes, that is what he said. Really. Turnbull think a one-off $2 billion government infrastructure project is “nation building”.

Let’s look at $2 billion in the context of the Australian economy.

In the December quarter 2016, Australia’s GDP was $435,445 billion dollars (seasonally adjusted). This works out at $4,769 billion a day which makes the $2 billion snow job about 10 hours GDP.

Useful? Sure!

Nation building? Ha!

By 2020, Australia’s GDP will be around $510,000 billion a quarter and $2 billion will be akin to about 8 hours GDP.

Here’s what elese $2 billion is now days.