Malcolm Edey: Inquiry into affordable housing
Opening remarks by Mr Malcolm Edey, Assistant Governor (Financial System) of the
Reserve Bank of Australia, and Ms Luci Ellis, Head of Financial Stability Department of the
Reserve Bank of Australia, at Inquiry into Affordable Housing, Canberra, 2 October 2014.
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Thank you, Chair, for the opportunity to discuss the Reserve Bank's views on this important
topic of housing affordability.
This is a subject on which the Bank has published a good deal of analysis over the years. I
will refer in particular to our submission to this Inquiry in February, and also to our most
recent Financial Stability Review, released last week, which covers our assessment of
current developments. My colleague Luci Ellis was the author of the February submission
and she will be happy to answer any detailed questions on its contents in due course.1 In
these opening remarks, I will be drawing on some of the key points from those two sources.
There are a number of things that people might have in mind when they use the term
"affordability". Affordability measures will differ depending upon whether we are talking about
owners or renters, and on whether we are interested in some specific market segment, like
first home buyers or low-income households. For owner-occupiers, perceptions of
affordability will depend on many things including price, household income, the cost and
availability of finance, and a host of factors affecting the needs and aspirations of the buyer.
In any analysis it is necessary to make use of summary measures, while acknowledging that
these inevitably gloss over the diversity of experience across different types of households.
Much of the public discussion on affordability is focused on home purchasers. A useful
summary measure is the repayment on a typical new housing loan expressed as a ratio to
disposable income. On that metric, housing affordability in Australia has fluctuated around a
broadly stable average over the past three decades, with average repayments varying
between around 20 and 30 per cent of disposable incomes. These data are reported in our
submission. Currently this figure is a bit below average, but it has been rising in the period
since the publication of the submission, as the housing market has gathered momentum.
Over the same 30-year period, the ratio of housing prices to incomes has increased
substantially. These developments in prices and affordability have been inter related.
Housing prices received a substantial boost from the combined effects of disinflation and
financial deregulation, which lowered the cost and increased the availability of finance. Much
of the increase in the price-to-income ratio was concentrated over the 10-year period to the
end of 2003, when this ratio increased by around two-thirds.
It is reasonable to think of this as a transitional impact on housing prices that will not
reoccur. Both the shift to low inflation, and the comprehensive deregulation of the financial
system, are things that only happen once. In broad terms, the adjustment of the housing
market to this new environment seems to have been completed by around the middle of the
last decade. Since then, the ratio of housing prices to incomes has been relatively stable but,
for reasons already alluded to, it has been rising recently and is now at the upper end of its
recent range. I will return to this point in a moment.
To summarise these stylised facts:
• the ratio of housing prices to incomes is at the top of its historical range; but
• over time, this has been more than offset by falls in financing costs, so that the
typical repayment burden as a share of income is not particularly high. This of
course does not rule out affordability problems in particular market segments or for
particular types of households.
Our submission made the point that there is no shortage of housing finance in Australia.
Housing loan interest rates are currently as low as they have been in a generation, and
households are not artificially constrained from borrowing as much as they can reasonably
be expected to repay. I have already made the point that perceptions of affordability will differ
across different types of households; but, if there is a perceived affordability problem in
Australia, it is not due to a lack of finance.
An important theme of our submission was that housing prices and affordability are affected
by the interaction of both supply and demand factors. The factors that I have mentioned so
far, such as household incomes and the cost and availability of finance, primarily affect the
demand side of the market. In the short to medium term, it is these factors that will tend to
have the predominant influence on housing price movements. The reason for that is that the
supply side of the market is dominated by a large existing stock of dwellings, and new supply
takes time to come on stream.
In the longer term, however, supply factors are critically important. It is the supply response
that determines the extent to which additional demand results in higher prices over time.
Our submission highlights that Australia faces a number of longstanding challenges in this
area, including regulatory and zoning constraints, inherent geographical barriers and the cost
structure of the building industry. There are also obstacles to affordable housing created by
Australia's unusually low-density urban structure, though this is gradually changing.
Our submission does not seek to offer policy prescriptions for improving the supply-side
response. The general point I would make is that we can't improve housing affordability
simply by adding to demand. Targeted assistance can certainly help particular groups such
as first home buyers, but without a supply-side response, any generalised increase in
demand will just be capitalised into prices. Hence an important emphasis in our submission
is that due attention needs to be given to supply-side factors in any policy response to
perceived problems of affordability.
Let me turn now to some current developments.
I have already mentioned the recent strength in Australian housing prices and I expect the
Committee will be interested in the Bank's current assessment of this, particularly in light of
the comments made in our Financial Stability Review last week.
Over the past couple of years, housing prices in Australia have been rising strongly. Some of
this perhaps represented an element of "catch up" after some earlier weakness.
Nonetheless, prices have continued to rise significantly faster than incomes, and this has
been associated with strong growth in investor activity.
To cite a few key facts and figures:
• National housing prices have been rising at a rate of around 10 per cent over the
past year, and around 15 per cent in Sydney.
• The rate of growth of investor finance is significantly outpacing the growth in
household incomes.
• Loans to investors currently account for close to 50 per cent of new housing loan
approvals.
• Investor activity has been particularly concentrated in New South Wales and
Victoria. In New South Wales investor loan approvals have increased by about
90 per cent over the past two years.
It is against this background that the Bank said in its Financial Stability Review last week that
the composition of housing and mortgage market activity is becoming unbalanced. The
review also indicated that we are discussing with APRA steps that might be taken to
reinforce sound lending practices, particularly for investor finance, though not necessarily
limited to that.
I want to emphasise that the banks in Australia are resilient, and mortgage lending in this
country has historically been relatively safe. APRA has, however, noted a trend to riskier
lending practices, and over the past couple of years has been seeking to temper these
through its supervisory activities. There are also broader concerns with the macroeconomic
risks associated with excessive speculative activity, since this activity can amplify the
property price cycle and increase risks to households.
Our discussions with APRA and other agencies on these matters are ongoing, and there will
be more to say about them in due course. For now, my colleague and I will be happy to take
any questions that you might have.