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MFAA Prosper : Mortgage and Finance Brief 06
the GFC has left the global credit market in a more conservative state and Australia’s banks reflect this with more conservative lending policies – credit will be a little harder to get this time. A nd households are exhibiting some nervousness and are tending to save a little more than they have in the past. This is not to say we have become a nation of savers – far from it – but at the margin household saving is not growing as fast as you would think it could, given robust income growth and falling unemployment. One last key difference is the Australian dollar. It has risen steadily and while we may believe that it could struggle to maintain above parity for an extended period of time, without another GFC it is set to remain around at least the high 90¢ well into 2011. This naturally lowers the cost of imported goods and squeezes the margins of import competing industries. Both are distinctly disinflationary influences. Rising interest rates will impact on both house prices and construction activity... but not necessarily in the way you might expect The rise in interest rates has had an impact on the demand for housing finance approvals and perhaps, more critically, demand for the construction of new homes. While the pipeline from existing approvals can keep construction activity contributing to growth through 2010, this pipeline fades into 2011 and so dwelling construction is now at risk of being adrag on growth in 2011. And the recent rate rise suggests this trend may only get worse before it gets better. This may not, however, be consistent with a significant decline in house prices. There remains an underlying shortage in housing, which is only set to get worse if we continue to under-build relative to demand. This shortage, along with robust incomes, is why we expect house prices to track broadly sideways for the next few years as rising interest rates take the mortgage repay ment burden for many households back to the level it reached during 2008. But the impact will not be equal in all regions and suburbs. The history of the Sydney property market highlights just what happens to a housing market as it matures and fragments. During 2006 and 2007, house prices fell in the outer suburbs but rose quite solidly in the inner suburbs. The outer reg ions tend to be more focused on industries servicing the domestic economy while the inner suburbs have more white-collar industries, which have a greater ability to capture some of the extra income being generated by the terms of trade and resource shocks. Now that housing affordability is converging around the country as other capital cities close the affordability advantage they used to have to Sydney, we expect to see similar outcomes across the country. Those suburbs and regions that can capture some of the resources boom income, and/or see strong population growth, will see house prices rise. These suburbs and regions that rely on domestically-focused industries, and have slower population growth, may see house prices fall. What does this mean for economic growth and interest rates? It is clear that some resources have to flow from the household, domestic economy. This is inevitable and part of the process to achieve this will come via the RBA lifting interest rates to encourage household savings. A nd the faster the resources sector g rows, the slower remaining parts of the economy have to g row to ensure we don’t bump up against capacity constraints. To do so would cause an outbreak of inflation, which would only exacerbate current imbalances and leave the Australian economy more exposed when the boom ends. For now, we see the RBA remaining on hold with a clear risk of rate rises further through 2011. We have an end point target of a cash rate of 5.50% but this will depend on two key factors: how much of the recent rise in the cost of funds banks pass on to mortgage rates and how responsive households are to the recent rate rise. Disclaimer: The information contained in this report (the Information) is provided for, and is only to be used by, persons in Australia. The information may not comply with the laws of another jurisdiction. The Information is general in nature and does not take into account the particular investment objectives or financial situation of any potential reader. It does not constitute, and should not be relied on as, financial or investment advice or recommendations (expressed or implied) and is not an invitation to take up securities or other financial products or services. No decision should be made on the basis of the Information without first seeking expert financial advice. St. George does not represent or guarantee that the Information is accurate or free from errors or omissions and St. George disclaims any duty of care in relation to the Information and liability for any reliance on investment decisions made using the Information. The Information is subject to change. Terms, conditions and any fees apply to St. George products and details are available. St. George or its officers, agents or employees (including persons involved in preparation of the Information) may have financial interests in the markets discussed in the Information. St. George owns copyright in the Information unless otherwise indicated. The Information should not be reproduced, distributed, linked or transmitted without the written consent of St. George. 22 | Mor tgage & Finance brief News 130 110 90 70 50 30 10 Melbourne Brisbane Adelaide Sydney Perth Mar '80 Mar '92 Mar '04 Mar '86 Mar '98 Mar '10 Perth prices are catching Sydney. Sydney is a demonstration of how poor affordability can create a ceiling for prices. HOUSE PRICES ADJUSTED FOR INFLATION $'000
Mortgage and Finance Brief 05
Mortgage and Finance Brief 07