RBA paves the way for steadier dwelling price growth

The Reserve Bank is certainly going to town on its housing market speeches at the moment, as I previously noted here. Recently the head of Financial Stability, Luci Ellis, gave a speech in Sydney, they key themes of which I summarise below.

Make no mistake, when the RBA prepares charts it does so with an underlying message in mind.

Let’s see what we can decipher.

Firstly, Australia is no longer the high-inflation country that it was in the 1970s and 1980s, but note how house prices did continue to rise even as inflation slowed.

Graph 1: Consumer Prices and Housing Prices


Because inflation acts as a ‘credit constraint’. In other words, interest rates include an inflation compensation component.

So, as inflation fell, so did the inflation compensation component of mortgage rates.

Therefore, estimates the RBA, due to lower inflation, we might expect the borrowing ratio roughly to have doubled as measured against income multiples.
Graph 2: Maximum Loan-to-income Ratio
Says the RBA, they would have expected household debt to rise.

And it has.

However, the transition period ended way back in 2005. Since then, the debt-income ratio flattened, in their own words, “to a new, higher average“…

Graph 3: Household Finances
And, in recent years, households have begun to save again.

Graph 4: Household Saving Activity
Expect on average national future dwelling price growth and credit growth to be slower in the future, says the RBA.

The population continues to boom, by around 380,000 persons per annum at the current rate of expansion, and the number of persons per dwelling has fallen dramatically over the decades.

Therefore we need tens of thousands of new dwellings each year to house the rapidly growing population.

Graph 5: Dwelling and Population Growth
The urban population of Australia is massively focussed on the two largest cities, with nearly 40% of us living in those two metropolises.

We have a lot of land, but most people only want to live in a very small part of it: the “acceptable range of locations is limited.”


Graph 6: Urban Population
Why the problems with constraints on supply?

Largely, because individually we use so darned much of the desirable land.

We live on enormous plots and have the least dense population of any country with cities of a comparable size. Only NZ is anywhere remotely close to Australia in this regard.

Graph 7: Urban Population Density
Land cost isn’t the real problem, says the RBA, and it isn’t government charges either, which make up a small component of property prices.

It’s overwhelmingly the construction costs of our shiny new dwellings that makes new property an increasingly expensive proposition.

Graph 8: Construction Costs
Key quote:

“…the price of our low-density life has become unaffordable for some. 

It therefore seems likely that our cities will become denser over time.

If so, the mix of residential construction will be tilted more towards medium-density and high-density dwellings than in past decades.”

Graph 9: Apartment and Medium-density Housing
Prices are rising in some cities, notably Sydney and Perth. Flat for many years now in others such as Brisbane and Adelaide, and also very little house price growth in regional Australia.

Graph 10: Dwelling Prices
I noted that the RBA prepares charts with a message behind them.

We have seen the below chart before, intended to demonstrate that with lower interest rates, repayments on new housing loans aren’t nearly as high as a percentage of household disposable income as the popular consensus would have you believe.

Graph 11: Repayments on New Housing Loans
Note how the RBA has added a second (blue) line now. The message being delivered here: not only are repayments now more affordable on new housing loans they are also considerably cheaper on existing housing loans.

The underlying point, with interest rates set to fall even further, appears to be: “Stop complaining about property prices, because your repayments are lower.”

As noted above, we’ll have more higher-density dwellings in the future, and fewer detached houses:

Graph 12: Private Residential Building Approvals
But, the RBA highlights that it takes longer to build a block of apartments than it does houses in fringe suburbs.

The undersupply is set to become a major problem in some urban areas: “It might well be that construction lags – and concerns about supply – will become even more acute.”

It’s a worrying trend of appropriate supply failing to meet demand, certainly in my part of the world (Sydney).

Rental yields have been rising. Bond yields have been smoked.

Graph 14: Rental and Indexed Bond Yields
Lending standards have become much tougher – fewer low-doc loans, for example.

This is good for market stability.

Graph 15: Banks' Housing Loan Characteristics

On average price growth and credit growth will be slower than we have seen in the past, but I am expecting the construction lag to cause a major undersupply of desirable dwellings in inner- and middle-ring Sydney suburbs and some other supply-constrained regions.

The interest rate cut on May 7th may see median dwelling prices markedly higher by 2014 and payments on new housing loans revert upwards.

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is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. Using a long term approach to building businesses, investing in equities, & owning a portfolio he achieved financial independence at the age of 33. Visit his blog

'RBA paves the way for steadier dwelling price growth' have 7 comments

  1. Avatar for Property Update

    May 23, 2013 Pete Wargent

    Hi Jim, it is surprising!

    But that’s how cheap greenfield land is on the fringes in the distant outer suburbs, and 3 bedroom houses can indeed be bought for less than $400k. The price of greenfield land in Melbourne actually increased sharply during the FHB boost and then tanked again.

    Would I recommend investing there? No, never., for precisely that reason – the demand for land is very low.


  2. Avatar for Property Update

    May 18, 2013 Jim Lawrenson

    Like the article overall and don’t disagree with the overall argument
    Am amazed at the Construction Costs table showing cost of land for a 3 bedroom green field site in Melbourne at $K50
    Where can I get some?
    Surely there’s something wrong here


  3. Avatar for Property Update

    May 17, 2013 Pat Sanders

    Just wanted to ask what do you think Sydney property has gone up in the past 2 years till now, and how much it will go up approx in the current year till the new year. i have 2 torrens title double storey joinedtownhouses or duplex in Acaicia Gardens Between Blacktown and Baulkham Hills with great views to the Blue Mountains to the front of property unable to be built out, earning 480.00 a week each.

    Thanks Pat


  4. Avatar for Property Update

    May 17, 2013 Greg Coggiola

    With the trend to medium and high density housing and less people per household, even though this would logically mean less demand for detached housing, surely as the population is increasing by 380,000 approx p.a there will still be good price growth in detached housing within cities as this section of the market becomes “more exclusive” ?


  5. Avatar for Property Update

    May 17, 2013 Pete Wargent

    Plenty of vacant homes in Australia, no doubt about that.

    Just not where most of us want to live.


  6. Avatar for Property Update

    May 16, 2013 demografix

    There is no housing shortage. That is a property myth, like a property clock and that property always goes up.
    60% of our NOM are temp visa holders and 10% of our homes were vacant on census night. Really if you can see a correlation between population growth and a housing shortage, you are bias and blind.


    • Avatar for Property Update

      May 17, 2013 Greg Coggiola

      It’s an interesting perspective you adopt. It’s easy to take a broad stroke of the brush to property analysis, however IMO what is relevant statistic wise in Sydney or Melbourne in no way relates to the figures reported in say Mildura (VIC ) or Bathurst (NSW). Even the statistics across the entire Sydney and Melbourne regions should not be treated as comparing apples with apples. They are completely different demographics and unlike Europe or North America we have a very small population squeezed into small areas, with vast areas with tiny populations in between.
      To take the figures from all these different areas and throw them into the same spreadsheet and say
      property has dropped or risen by x% is wrong.
      Is this 10% vacancy you refer to in locations where people want to live
      or in ghost towns?


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