RBA’s Ellis Sees No Reason Australia to Follow U.S.-Style House Slump
Australia’s housing market will probably avoid a U.S.-style slump because lending standards are higher and borrowers are able to pay down debt faster than required, a Reserve Bank of Australia official said.
“Unlike in the United States, in Australia most mortgage lending is done by firms that are prudentially regulated,” Luci Ellis, head of financial stability at the RBA, said in the text of a speech in Sydney today. “Another important mainstay against a U.S.-style outcome is that many Australian households actually pay their mortgages down, often quite quickly.”
Ellis, who didn’t address monetary policy in her prepared remarks, said because property prices are growing slower than incomes, unlike in the 1990s and early 2000s, “soft periods in the housing market could now be more likely to involve falling housing prices.”
Australian house prices plunged by the most on record in 2011 as global economic uncertainty and concerns about its impact at home kept a lid on demand. An index measuring the weighted average of prices for established houses in eight major cities slid 4.8 percent from a year earlier, a government report showed Feb. 1, the biggest calendar-year drop since the data began in March 2002.
Ellis said there’s “no reason” Australia housing market will go from boom to bust like the U.S. did, and she urged mortgage lenders to “refrain from easing lending standards” as some American institutions did.
RBA Governor Glenn Stevens lowered the benchmark borrowing cost by a quarter percentage point on Nov. 1 and again on Dec. 6 as inflation pressures eased and asset-prices declined, before keeping the rate unchanged at 4.25 percent this month. Australia recorded its worst annual job growth in 19 years in 2011, as consumers boosted savings, even as mining investment fueled by Chinese demand intensified.
Australia, as in many other countries, doesn’t have the ingredients needed to create an outcome like that in the U.S., Ellis said, while sounding a note of caution.
“Housing lending is a larger fraction of the balance sheets of Australian banking institutions than for their U.S. counterparts,” she said. “So in the unlikely event a U.S.- style bust did happen, it would be harmful to financial stability in Australia.”
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