ric battellino : housing affordability in australia background notes for opening remarks by mr ric battelino, deputy governor of the reserve bank of australia, to the senate select committee on housing affordability in australia, melbourne, 24 april 2008. * * * the reserve bank is very pleased to have been invited to participate in this inquiry into housing affordability. the terms of reference of the committee are wide - ranging and extend well beyond the areas in which the reserve bank has expertise. we will therefore limit our remarks to four areas – namely house prices, housing affordability, housing loan arrears and the rental market. the key points we would like to make are as follows : 1. the increase in house prices in australia since the mid 1990s, while very large, has been part of a broad trend evident in most other developed economies. this suggests that the main forces that have underpinned this rise have been global in nature, rather than country - specific. 2. traditional measures of housing affordability have declined since the mid 1990s. specifically, housing loan repayments have risen strongly relative to incomes. the overwhelming factor that has led to this is the rise in house prices ; mortgage interest rates in australia are no higher today than in the mid 1990s, when housing was at its most affordable. 3. despite the sharp fall in traditional measures of housing affordability, arrears rates on housing loans remain low by historical standards. to some extent, this is a sign of the extraordinary commitment of australian households to meeting their housing loan repayments, even in the face of financial pressure. it is also the case, however, that for the household sector as a whole, rising levels of income have allowed households to devote a larger share of their income to housing repayments, while maintaining or even increasing their overall living standards. this has meant that, for many households, traditional benchmarks of affordability – such as the often - quoted 30 per cent rule – may now be somewhat dated. while the picture on arrears for the household sector as a whole is quite benign, there are nonetheless significant pockets in the community where the high price of housing is causing financial distress. 4. the rental market is currently very tight, with vacancy rates at low levels and rents rising quickly. this comes after a decade when rents increased by much less than the price of houses, causing rental yields to fall to levels that discouraged increases in the supply of rental properties. it is hard to avoid the conclusion that the rental

that is, the direct impact on petrol prices, but rather the second round effects that are of primary concern for monetary policy purposes. while there is little we can do about first round effects, we have to ensure that these effects do not adversely affect inflationary expectations and become more generalised and stimulate inflationary impacts across the economy. if sustained, the recent decline in oil prices augurs well for inflationary developments going forward. nevertheless, given the underlying market conditions and the vulnerability of oil prices to geopolitical tensions, these lower prices cannot be taken for granted and oil prices continue to pose an upside risk to our inflation outlook. 7. conclusion monetary policy has to be formulated against the backdrop of increasingly integrated goods and financial markets. this increases the uncertainty surrounding the workings of the monetary transmission mechanism. monetary policy making becomes more complicated since the nature and extent of influence of exogenous shocks on the domestic economy is difficult to determine in advance. with highly integrated money and capital markets, changes in sentiment, whether justified or not, can have profound implications for our economy. similarly, changes in growth prospects in the industrialised countries or emerging asian economies will also affect us. the exact nature and timing of these developments are always uncertain. as is often said in monetary policy circles, the only certainty is uncertainty. this is highly applicable to the uncertain impact of international developments on domestic monetary policy. i thank you.