More new dwellings needed but we’re still “lucky”: Glenn Stevens

Australia needs to build more houses and apartments than it has done in the past as population growth picks up, interest rates remain low and dwellings remain more affordable, says RBA governor Glenn Stevens.

In a speech in Brisbane today, in which he forecast “sub-trend growth” in the near term and challenges in shifting the economy from mining to non-mining sectors including real estate, he highlighted that Australia remains a “lucky country” because, among other things, the GFC slowed down household borrowing and prevented them from becoming financially over-extended.

Stevens said dwelling investment has been “low for an unusually long period, with at least some households intent on reducing debt, thereby strengthening balance sheets”.

“Households have accumulated a good deal of cash as well over recent years,” he said in an address to the Economic Society of Australia luncheon.

“Meanwhile, population growth is quite solid and it has been picking up a bit of late.

“If anything, we will need to build more dwellings than we have been over recent years.

“Meanwhile, interest rates are low, dwellings are more ‘affordable’, and finance approvals for housing purchases have risen by 16% over the past year.

"So there are ‘fundamentals’ that favour a pick-up in these [non-mining] sectors.

Stevens said that no-one can pretend to be able to fine tune the ‘handover’ from mining to non-resources sectors “on cue, by just the right amount”

“We have, in fact, had a few handovers over the past five years – from private demand to public in 2009, then to mining investment subsequently.

“Now we are looking back to household dwelling spending, non-mining investment (and exports).

“Previous handovers have occurred, largely successfully. That doesn't guarantee the next one will, though it does mean that we shouldn't assume that it won't occur.

Overall though he painted a picture of a relatively sound Australian economy.

“At this point, we have unemployment at about 5.5%, inflation ‘in the 2s’, the banking system is strong and government finances overall sound.

“Growth is on the slow side, inflation is low.

“That combination means that we have low interest rates (the lowest for fifty years in fact).

“Significant structural change is occurring, which is always challenging. But set in context, the macroeconomic data over recent years show a pretty respectable set of outcomes." 

He also returned to a theme of a  well-received speech made in August last year called The Lucky Country.

“It could equally be said that we were ‘lucky’ that the effects of the global economic downturn worked to help reduce inflation in Australia from its peak in 2008 of 5 per cent – which was way too high – to something acceptable.

“It could also be said that we were fortunate that the sub-prime crisis in the US emerged from early 2007, and not later. Although such lending was less prominent in Australia at that time, it was growing fast and would have become a much bigger vulnerability had it continued at that pace. The fact that things went wrong in the US when they did meant that what was a small problem here stayed small. 

“It could be added that we were lucky that the change in behaviour of households – slower borrowing, more saving – came when it did. For a start, had households continued as they were, they would have become more financially extended, and it is obvious now that that would have been risky. Moreover, this changed behaviour of households has helped us absorb the resources investment boom. 

“Of course the story is not yet finished. We have to negotiate the downward phase of the investment boom over the next few years, which appears likely to pose significant challenges. How will we meet them?"