Housing more affordable in March quarter

Rismark reports today that Australia’s average dwelling price-to-disposable household income ratio fell from its peak of 4.7 times in December 2009 to just 4.2 times in the March quarter of 2011.

In encouraging news for home buyers, Australia’s dwelling price-to-disposable income ratio is now back around its June 2003 level.

 With the exception of the GFC, this is the longest correction in Australia’s housing market valuation since Rismark’s analysis began in 1993 and confirms its projections last year. 1

This follows news yesterday that the RBA could keep its finger off the interest rate trigger until after the second-quarter 2011 inflation results are released in late July.

The headline mortgage rate is currently 7.8%, which is slightly higher than the average rate of circa 7.3% since the RBA adopted its “inflation-targeting” regime in the early to mid 1990s.

Rismark joint managing director Ben Skilbeck says: “We expect the national dwelling price-to-income ratio to continue to trend down over the next year or so as wages and disposable household incomes outpace capital growth. We are forecasting robust rental returns during this period, which should furnish owners with better total returns.”

“Contrary to popular myth, disposable household incomes in Australia have outpaced Australian capital city dwelling prices by a 7.5% margin over the last eight years based on RP Data-Rismark’s hedonic index.”

On the topic of when the RBA will next hike rates, ICAP’s Adam Carr says: “Having kept rates steady this month at 4.75% when there was a clear cut case to hike, the natural question is: what additional information could they possibly need to see to hike?

“My initial thoughts are that if they are going to wait till July, then waiting till August is no biggie. They are already behind the curve, so it makes little difference. I’d also note that there is no urgency in this [RBA] statement to hike in July – no clear signal. So until we see the board minutes, I think July and August are fairly even bets,” Carr says.

Terry McCrann of News Ltd and Fairfax’s Alan Mitchell are, however, today insinuating that an August move is more probable conditional on the second quarter inflation numbers supplying Australia’s central bank with a case to go. This brings them in line with UBS’s chief economist, Scott Haslem, who has long forecast an August hike.

If the inflation data do turn out to be benign, the RBA may be on hold until later in the year, consistent with Goldman Sachs’s Tim Toohey’s November forecast.

McCrann, who is known as the RBA’s “Shadow Governor” in financial markets, now believes that the RBA will need to be presented with an empirical catalyst to hike rates in July before receiving the next tranche of inflation data.

Tomorrow’s unemployment figures therefore loom large as a major monetary policy event. If the unemployment rate falls significantly below its current 4.85% level, which is widely regarded as consistent with a “fully employed” labour market, the RBA may feel it has sufficient justification to undertake another rate increase.

There has been widespread speculation that the RBA’s executive is at loggerheads with its more “dovish” board, which contains five representatives of corporate Australia, including businesses that are adversely affected by higher interest rates and an elevated currency. These include a current director and former CEO of the large retailer Woolworths.

McCrann has rejected this critique, and declares today that the RBA Board is “unified” around its comparatively dovish position, which has thus far ignored Australia’s very high first quarter inflation results.

Another swing variable is the departure of the notoriously “hawkish” Professor Warwick McKibbin from the RBA Board. July will be Professor McKibbin’s last board meeting.

Australia’s central bank has missed its 2.5% per annum through-the-cycle inflation target over the last decade, with underlying or “core” inflation averaging a substantially higher 3.0 per cent.

Alongside Norway, Australia has the highest inflation target in the developed world.


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