Australia has its own place in the world when it comes to housing affordablility: RBA’s Glenn Stevens

The US housing market is now an “outlier” when it comes to making international comparisons, says RBA governor Glenn Stevens, who appears to be questioning whether we should compare ourselves with the US when considering the likelihood of possible future housing corrections.

Stevens says that simply comparing the two markets – Australian and the US – it would be “hard to avoid the impression that gravity will inevitably exert its influence on Australian dwelling prices”

But when you compare Australia with other international housing markets, Stevens says, “the picture is much less clear”.

“To the extent that we can make any meaningful statements about international relativities, the main conclusion would be that Australian dwelling prices, relative to income, are in the pack of comparable countries. In this comparison, the United States seems the outlier,” he said in a speech to the Anika Foundation Luncheon in Sydney today.

Stevens presented two charts to show how Australian housing affordability has diverged from the US since 1986, but performed in line with many other comparable countries.

The first of these charts just compares Australia to the US on the basis of dwelling prices to income ratios and shows that the two countries were last on a comparable footing in 1986 – but since then have diverged marketedly.

Between now and 2011 Australian house prices have trended up from a ratio of 2:1 to 4.1 – with slight correction around the GFC while US house prices relative to income have remained below a ratio of 2:1, having accelerated towards a ratio of 3:1 from around 1996 until the GFC brought about a dramatic fall in prices.

Comparing Australia with a host of other international housing markets on the same ratio measure, Stevens presented a difficult to read spaghetti-like chart (below).

It does however show that countries like New Zealand, the Netherlands and the UK have housing markets performing in the realm of the Australian market, while Japan is now more closely linked to the US.

Explaining the international shifts in housing affordability, Steven said that as everyone knows, “dwelling prices rose a great deal over the decade or more from 1995, and not just in Australia”.

“This occurred globally. The fact that it was a widespread phenomenon is a hint that we should be wary of explanations that are solely domestic in their focus. It suggests that the global dwelling price dynamic had a lot to do with financial factors – and there is little doubt that finance for housing became more readily available.

“In various countries prices have subsequently fallen. In the United States, for example, prices are down by about 30% from their peak, though they look like they have now reached bottom.

“In the United Kingdom the fall was smaller – at about 15%–20%.

“In Australia, the decline since the peak has been about 5% to 10%, depending on the region. There are of course prominent examples of particular localities or even individual dwellings where price falls have been much larger,” he says.

Explaining the international shifts in housing affordability, Steven said that as everyone knows, “dwelling prices rose a great deal over the decade or more from 1995, and not just in Australia”.

“This occurred globally. The fact that it was a widespread phenomenon is a hint that we should be wary of explanations that are solely domestic in their focus. It suggests that the global dwelling price dynamic had a lot to do with financial factors – and there is little doubt that finance for housing became more readily available."

“In various countries prices have subsequently fallen. In the United States, for example, prices are down by about 30% from their peak, though they look like they have now reached bottom."

“In the United Kingdom the fall was smaller – at about 15%–20%. In Australia, the decline since the peak has been about 5% to 10%, depending on the region. There are of course prominent examples of particular localities or even individual dwellings where price falls have been much larger,” he says.