‘No bub­ble’

Port Douglas & Mossman Gazette - - FRONT PAGE -

WEST­PAC chief econ­o­mist Bill Evans says anal­y­sis of the Re­serve Bank board’s Septem­ber Fi­nan­cial Sta­bil­ity Re­view does not sug­gest the RBA is con­cerned about a po­ten­tial prop­erty bub­ble.

In a note re­leased yes­ter­day, Mr Evans said: ‘‘There has been con­sid­er­able me­dia at­ten­tion around po­ten­tial prop­erty bub­bles in Aus­tralia which might con­strain the Bank from cut­ting rates fur­ther. An ap­pro­pri­ate op­por­tu­nity to high­light that case was avail­able in the Septem­ber Fi­nan­cial Sta­bil­ity Re­view. There is no con­vinc­ing ev­i­dence from this Re­view that the bank [RBA] is con­cerned about such prospects’’.

This re­port was of more than usual in­ter­est as it pro­vided the RBA with its most ap­pro­pri­ate ve­hi­cle for high­light­ing any con­cerns around po­ten­tial prop­erty mar­ket and house­hold bal­ance sheets stem­ming from the cur­rent low in­ter­est rates, Mr Evans said. ( Note that de­spite the overnight cash rate be­ing 2.5%, be­low the pre­vi­ous cycli­cal low of 3.0 per cent in 2008-09 the head­line (be­fore dis­counts) vari­able mort­gage rate is 5.95 per cent com­pared to 5.75 per cent in 2008-09).

‘‘Our read­ing of the Re­view in­di­cates that there is no high de­gree of con­cern from the bank around prop­erty mar­ket or house­hold bal­ance sheet ex­cesses,’’ Mr Evans said.

There are some ‘‘re­spon­si­ble’’ warn­ings. ‘‘Of par­tic­u­lar im­por­tance is that banks main­tain pru­dent risk ap­petite and lend­ing prac­tices, es­pe­cially in the low in­ter­est rate en­vi­ron­ment,’’ the RBA state­ment says.

The Bank notes ‘‘the risk pro­file of new house­hold bor­row­ing re­mains rea­son­ably sound and in­di­ca­tors of house­hold fi­nan­cial stress are rea­son­ably low’’ and there is ‘‘a con­tin­ued rate of ex­cess re­pay­ments on home loans’’.

The cen­tre of strong­est hous­ing ac­tiv­ity is con­cen­trated in NSW it is ‘‘im­por­tant that those pur­chas­ing prop­erty do so with re­al­is­tic ex­pec­ta­tions of fu­ture dwelling price growth’’. It is sug­gested that over the medium term that should be around the growth rate in nom­i­nal in­comes.

The Bank is par­tic­u­larly fo­cused on the strong buf­fer which ex­ist­ing bor­row­ers have built up due to the jump in the sav­ings to around 11 per cent and the con­sis­tent fall­ing in­ter­est rates. It notes that ‘‘around half of house­holds have not re­duced re­pay­ments as rates have fallen’’ and ‘‘mort­gage buf­fers re­main near highs since (first mea­sured) in 2008’’.

Th­ese buf­fers which are com­monly known as mort­gage off­set or re­draw fa­cil­i­ties aver­age 14 per cent of loan bal­ances, in­di­cat­ing bor­row­ers could cover 21 months of in­ter­est pay­ments in the event of los­ing cur­rent cash flow through, say, un­em­ploy­ment.

The Bank ac­cepts that some of the re­sults par­tic­u­larly from the ‘‘wis­est sav­ings’’ ques­tions in the West­pac Melbourne In­sti­tute Con­sumer Sen­ti­ment Sur­vey point to "a slight shift in house­hold pref­er­ences to­wards riskier as­sets’’.

How­ever the Bank seemed quite re­laxed: ‘‘In­creased fi­nan­cial risk tak­ing is an ex­pected out­come of lower in­ter­est rates’’.

It did cor­rectly note that the cen­tre of the strong hous­ing ac­tiv­ity has been in NSW, point­ing out that 40 per cent of lend­ing ap­provals in NSW have been to in­vestors re­spond­ing to the re­cent pick up in Syd­ney house prices.

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