'Complex' housing crisis to challenge Glenn Stevens

On the same day NSW Premier asked former RBA governor Glenn Stevens to help make Sydney housing more affordable, a central bank assistant governor said the challenges are more complex than “the single metric of affordability”. 

According to RBA assistant governor, Luci Ellis, speaking in Melbourne at the Australasian Housing Researchers Conference yesterday, the current crisis in housing affordability is being misread.

Just as Stevens, who last year retired after 10 years as RBA governor, accepted a role to advise the state on housing affordability, Ellis said rising median house prices do not explain the complex forces ostracizing, for example, first home buyers from entering the “crucial” market.

Ellis said the situation is “more complex”, than media reports have been suggesting.

Largely following data provided by HILDA, Ellis said the 25–34 age group the core of first home buyers, has seen an enormous demographic shift since the post-war Baby Boom.

Historical patterns

And while home ownership in this group has dropped by more than 10 per cent since the 1970s, that had generally happened by the early 1990s - long before the historic increase in housing prices relative to incomes.

“What changed during that earlier period was that people started partnering and settling down later in life,” Ellis observed.

And because many people wait to settle down before they buy a home, he added, Australian home ownership rates for young people declined as a result.

“I am suggesting that the situation is more complex than would be suggested by a single-minded focus on a single metric of affordability, such as median housing prices,” she said.

Ellis also described as "surprising" data that implies, as housing prices have risen, the distribution of loan-to-valuation ratios – the converse of the deposit – haven't also “shifted up over time".

“If anything it (the loan-to-valuation ratio) has declined in the past few years for which we have data,” she said. “It's not entirely clear why this is.

Important step

"And because a high loan-to-valuation ratio does imply higher risk both for the borrower and the lender, it might not be such a bad thing. But it does suggest that, again, the situation is more complex than a simple summary statistic can capture.”

According to Ellis, the troubled housing sector Stevens will inherit is crucial to the processes of monetary policy, the welfare of households and the stability of the financial system.

“It is a key part of the transmission mechanism of monetary policy. Housing prices respond to interest rates, and in turn affect household consumption through wealth and collateral effects," she added.

In a statement provided to AB+F, the NSW Government said the appointment of Stevens was, “an important step towards the development of a comprehensive housing affordability strategy aimed at helping first-time homeowners enter the property market".

"I've asked him to provide advice on all the options that we are considering already as a Government on this very important public issue and I believe there is no-one better qualified to undertake this very important task," Premier Gladys Berejiklian said.  

Banking, Wealth,
RBA, Glenn Stevens, housing
Christian Edwards, cedwards@financialpublications.com.au
Article Posted:
February 17, 2017

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