Australian Outlook by Maquarie Economics

! With no data released in Australia this week, the Reserve Bank of Australia
(RBA) provided an update on how they feel about the current health of the
Australian economy and financial system. The Financial Stability Review was
released, while head of economic analysis, Anthony Richards, spoke on the
‘Conditions and prospects in the housing sector’.
Impact
! Richards provided an optimistic outlook on the Australian housing market over
the medium term. He argues that the massive degree of policy stimulus
provided in the past six months has contributed to far more accommodative
conditions in the housing market, resulting in a pick up in interest from
potential home-buyers, as well as easier conditions for existing home-owners.
! He also addressed some key features that distinguish the Australian housing
market from those of the US and UK. Meanwhile the Financial Stability
Review provided a relatively upbeat assessment of the Australian financial
system.
Analysis
! Housing finance commitments have increased markedly in the past few
months, driven by dramatic improvements in housing affordability. While this
improvement has mostly been focussed on approvals for existing homes, the
RBA liaison with homebuilders has shown some evidence of a pick-up in
construction activity as well. Furthermore, improvements in auction clearance
rates compared to this time last year are also showing a pick-up in demand
for housing.
! Indeed this week’s speech by the RBA’s head of economic analysis, Anthony
Richards, highlights these signs of life in the Australian housing market, which
is likely to be the key sector contributing to a turnaround in fortunes for the
domestic economy in the year ahead.
! Richards also notes some key factors that differentiate the Australian housing
market from those in the US and UK, which have experienced sharply falling
house prices over the past year.
! The first key point is that Australian monetary policy has been far more
effective in gaining traction on market rates compared to global peers. The
RBA has lowered the official cash rate by 400bp since September last year.
Since then, standard variable mortgage rates have come down by 375bp, and
the average interest rate paid on all outstanding loans (an average of fixed
and floating) has come down by 265bp.
! As a result, affordability has improved substantially in Australia, which is
contributing to stronger demand, particularly at the lower end of the housing
market. Indeed, as the second chart opposite shows, while house prices have
fallen sharply in the most expensive suburbs, prices in other suburbs (which
are a much larger proportion of total housing stock) have held up reasonably
well.
! In contrast, central banks in the UK and US have cut official rates by even
more than the RBA, but rates paid by mortgage holders have fallen by less
than 200bp in the UK and less than 50bp in th
! The final key factor addressed in the speech was a
comparison of lending standards between Australia and
the US.
! The comparison of non-performing loans in the US and
Australia is stark. Most importantly, is that even during
the boom years, Australian lending standards were
nowhere near as relaxed as in the US, with the ratio of
US non-performing loans much higher, even when both
economies were growing strongly.
! Subsequently, Richards explicitly stated that he does not
believe that the current easier conditions in Australia will
lead to an expansion of riskier lending practices. This is
due to a recent tightening of lending standards and a
reduction in maximum loan-to-value ratios.
! Furthermore, Richards highlights that ‘many of the
lenders that might have been most likely to write riskier
loans have scaled back their activity’.
! Indeed, this theme was also prevalent in the RBA’s semiannual
Financial Stability Review, which provided a
positive assessment of the Australian financial system,
despite global financial market instability.
Lending practices have been far more stringent in
AustraliaBanks' non-performing housing loans as % of on balance sheet
loans.

! While the banking system is no doubt facing some of the
most difficult conditions for some time, the RBA report
highlights that the Australian banks continue to find
themselves well placed to weather the global financial
storm, as they considerably outperform global peers.
! The RBA highlighted the key points of strength within the
Australian banking sector. These include strong
profitability, limited exposure to high risk securities,
strong capital positions and the maintenance of high
credit ratings by the major banks.
! Certainly, the key theme pushed by policymakers this
week is one of relative strength across both the housing
market and financial system in Australia.
! That said, we do not believe that too much can be read
into this positive rhetoric in regards to the outlook for
interest rates. While the housing market will be very
important in generating a turnaround in activity over the
medium term, the RBA will still be very concerned about
the worsening short-term outlook, as unemployment rises
and confidence levels remain fragilee US.