The RBA’s view on the economy and our property markets

Want a good read? Check out the Reserve Bank’s Financial Stability Review.

Sure, it’s not everyone’s cup of tea, but this report which is published half yearly is an absolute treasure trove for anyone interested in the Australian economy, or more importantly, how the Reserve Bank is interpreting economic data which of course as a flow through to monetary policy settings.

One of the most interesting sections of the Review is the RBA’s views on the Melbourne housing market (page 48/49) – more on that later. For those that don’t want to wade through all 66 pages, here is a one minute run down of the important stuff.

  • Global financial conditions have improved over the past six months (despite the recent Cyprus fiasco). The Eurozone is making the hard decisions required to dig themselves out of an economic hole although the region continues to face significant challenges. Even though conditions are improving, it is probably safe to say that the Eurozone remains the biggest risk to global financial stability.
  • The US economy is gathering momentum and the Asian nations are generally in good health.
  • Global equity markets are trending higher indicating growing confidence.
  • Australia’s banks also remain in a healthy position, with global wholesale funding costs easing. Despite the cheaper wholesale finance, banks are continuing to attract domestic deposits, so reliance on global money markets has been reduced. Australia’s banks are very profitable despite low levels of credit growth, which provides a strong global position when it comes to meeting the Basel III capital requirements.

Graph 2.9

  • Domestic business failure is at a historically high level, a factor related to Australia’s high exchange rate and the high rate of household savings (consumers are spending less). Even though more businesses have folded, the vast majority of businesses continue to meet their debt obligations (business loan arrears peaked in 2010 at around 3.6% and were below 3% in December.

Graph 3.4


Graph 2.1

  • The net wealth of households has been rising on the back of higher dwelling values and improving equity markets together with a general aversion by households to take on more debt. The debt servicing capacity of households is also improving thanks to lower interest rates.

Graph 3.11

  • The arrears rate for home loans peaked in 2011 and is now moving lower with just 0.5% of Australian mortgages more than 90 days in arrears. The arrears rate is moving lower despite some softening in the labour market with the rate of unemployment edging higher over the past year.
  • Importantly, as interest rates have fallen, most households have continued to repay the same level of principal and interest when servicing their mortgages. Additionally, the proliferation of offset facilities is allowing households to accumulate savings that can be offset against their mortgage debt. This has resulted in a substantial buffer being built up across mortgage holders, to the extent that the aggregate mortgage buffer is now nearly two years (around 20 months) ahead of their repayments schedule. Given such a large buffer, households have some flexibility in their repayments if further softening in the labour market does eventuate. The growing mortgage buffer is also one of the reasons why housing credit is growing at historically low levels.

Graph 3.13

  • The RBA points out that although financial stress across households remains low, household debt and gearing remains very high. The Bank goes as far as to imply that households should continue to save and reduce debt to further strengthen their financial resilience. This statement is probably the biggest hint that interest rates aren’t going to fall further in an effort to stimulate consumer spending and household activity. Rather, any further rate cuts are likely to be in response to a weakening labour market or a global shock.

Graph 3.12

The RBA’s comments with regards to the Australian housing market were overall very positive. The fact that mortgage arrears peaked at about 0.6% in 2011 and have now slipped to 0.5% of all mortgages is a solid sign that households are adequately coping with their mortgage repayments. The RBA has relied on the RP Data-Rismark hedonic indices to comment on the recovery in dwelling values to date. Based on the RBA analysis, dwelling values are up by around 4% since the May 2012 trough.

Using a more up to date measure, based on the RP Data Rismark daily five capital city aggregate index, dwelling values have recovered by 4.7% through to March 27th.

RP Data Rismark Daily 5 city aggregate

Where the RBA has expressed a specific concern though is with the Melbourne housing market. The Bank has singled out Melbourne, expressing concern about the build-up of housing supply across the inner city apartment market and detached housing markets across the outer suburbs.

“Although housing loan arrears rates are currently low across most parts of Victoria, the outlook for the Melbourne property market appears to be softer than for other large cities and some banks have signalled that they will be alert to any signs of deterioration in asset performance. The current stock of land for sale is at a high level and building approvals data point to increases in the stock of housing, and potential oversupply, in some parts of Melbourne, particularly the inner-city apartment market (Graph 3.20). This is on top of previous strong supply of detached housing in the outer suburbs. The increase in the stock of housing is consistent with Melbourne dwelling prices declining further and recovering less of their earlier decline than prices in most other capital cities have done.”

The RBA makes a fair point, and I have said on a number of occasions that Melbourne’s resilience to date has been surprising. The multi-graph below from the RBA highlights the key issues.

Graph 3.20 with RP Data comments

Another weakness for the Melbourne housing market is the fact that transaction volumes have stabilised at a low level; the city isn’t seeing the same upwards trend in sales activity that has been noticeable across recovering markets such as Perth, Brisbane and the Sydney property market.

The low rate of sales activity has seen listing numbers mount across Melbourne, to the extent that there are currently about 10% more homes being advertised across Melbourne than there were a year ago.

Melb transaction volumes

The RBA also point out that historically higher levels of home loan arrears have been recorded across particular housing markets after a period of strong value growth coupled with a large number of new dwelling commencements.

For example, loans that originated in New South Wales between 2003 and 2006 and those that originated in Queensland and Western Australia between 2007 and 2008 have shown a higher proportion of arrears rates.

This profile of rapid dwelling value growth and large scale home building fits the Melbourne situation quite comfortably over the past five years.

Dwelling values increased by close to 55% between the beginning of 2007 and the 2010 market peak. At the same time dwelling approvals across Victoria surged (as can be seen in the RBA graph 3.20 above).

While I concur with the RBA that the inner city apartment market and outer fringe detached housing market is facing some serious oversupply challenges, that doesn’t necessarily mean that Greater Melbourne is facing a prolonged period of subdued market conditions.

If the early indicators for 2013 are anything to go by, the Melbourne market is showing some positive signals.

In Melbourne’s favour is the fact that auction clearance rates are pointing to strengthening market conditions. Melbourne is Australia’s largest auction market, so clearance rates are one of the best and most timely indicators of how well buyer and seller expectations are aligned.

Last week the clearance rate in Melbourne was 69.2% and the average clearance over the year to date is 65.9%. The last time clearance rates were this high in Melbourne was August 2010.

Clearance rates

Additionally, the broad Melbourne market has shown a reasonable level of recovery since the market bottomed out in May last year. Values are up 5.9% since bottoming out last year, with 2.9% of the growth having taken place during 2013.

Melboiurne recovery

Additionally, the average time a home is on the market has been reducing in Melbourne and levels of average vendor discounting have also been showing some subtle improvements.

The inner city apartment market in Melbourne and the outer fringe housing market are likely to be an underperforming segment over the coming years; at least until supply levels are absorbed which will take some time. Melbourne faced a similar scenario in the early part of the last decade when the Dockland’s precinct sprung out of the ground in a flurry of apartment development activity.

The oversupply of apartments dampened conditions in that precinct for the next five years, but supply was eventually absorbed and the Dockland’s precinct gradually started to record capital gains and rental growth.

These two precincts aside, Melbourne has shown a strong start to 2013. The big question will be whether the performance across the other segments of Melbourne’s housing market will be strong enough to bolster the headline figures to maintain growth.

A key factor that will determine the outcome for Melbourne’s inner city apartment market and outer fringe will be population growth, which can be read as buyer demand. In raw numbers, Victoria is recording the largest number of new residents compared with other states (up 89,000 over the year to June 2012) and the population growth rate is 1.6%. Another key factor will be how successful the development sector is at delivering new housing stock that is competitive in pricing, design and location compared with existing stock.

Time will tell, but undoubtedly the Melbourne inner city and outer fringe housing market will under a great deal of scrutiny over the coming year.



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Tim heads up the Core Logic RP Data research and analytics team, analysing real estate markets, demographics and economic trends across Australia. Visit

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