Unlike some economists and industry professionals, the Reserve Bank of Australia couldn’t be happier with the weakening property markets of Sydney and Melbourne.
Business Insider Australia reported that, according to the minutes of RBA's latest board meeting, the board spent significantly more time than usual assessing the complex connection between Australian property values household debt and economic activity.
“In the first place, the RBA will be reassured there's little sign that the country's house price bubble is headed for a spectacular collapse,” the news portal noted.
More importantly though, the central bank recognized that Sydney and Melbourne property prices are gradually trending lower, and noted that this is what they wanted to see.
RBA stated that “housing prices had declined in Sydney and Melbourne following significant increases in previous years,” pointing out that “housing prices had fallen by almost 5% in Sydney over the preceding year."
The minutes of the meeting provided a concrete reason for the downturn, saying that “housing credit growth had declined, mainly because investor demand had slowed noticeably."
Indeed, prices are cooling in both cities because a significant number of investors, who no longer see chances of making quick profits from buying properties, have left the market.
Another reason given are the stricter lending standards adopted by bankers. RBA further acknowledged the possibility that banks will implement firmer lending standards following the Hayne royal commission.
It is important to note that RBA is keenly monitoring the property market due to its relationship to household indebtedness. When home values increase, buyers begin to think that they won’t able to afford the listings in the market without availing of larger mortgages, pushing the country’s household debt levels higher.
"Household debt has increased by more than household income over the preceding three decades in many countries, but particularly so in Australia," RBA also revealed in its minutes.
There are many factors causing this relentless rise in household debt. Falling interest rates, for one, have meant that borrowers can manage to service bigger debts.
While Australia is not the only country in this situation, what is different about Australia is that Aussies are more inclined to borrow in order to invest in housing, which has driven household debt to income ratio to a record high of about 200%.
The RBA is conscious of the economic risks brought by high household debt levels, but the bank remains cautiously optimistic that the country will be able to overcome any problems cause by these debts.
For instance, strong economic activity is stimulating jobs growth, and can eventually lead to stronger income growth, which will help households pay their debts.
Also, although housing prices are lower in Sydney and Melbourne, the large amount of work in the pipeline in New South Wales and Victoria implies that construction activity is going to remain robust in the two states for a period of time.
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RBA Keenly Monitoring Australia's Home Prices
