Don’t worry: RBA chief Glenn Stevens reassures Asians investors on Australian housing market

RBA governor Glenn Stevens has attempted to ease Asian investor concerns about high house prices and high levels of household debt in Australia while acknowledging the unevenness of the Australian economy and bank funding challenges created by the European crisis in an address in Hong Kong today.

Stevens acknowledged that “some observers worry about high levels of housing prices and household debt” during a speech at the Credit Suisse 15th Asian Investment Conference 2012.


“This is understandable given the problems that have occurred in some other countries.

“But then others point out that the arrears rate on mortgages, at 60 basis points, is quite low, and that the rate of new construction of dwellings in recent years has been low relative to population needs,” Stevens said.

Stevens said these same observers saw an economy that “experienced only a relatively mild downturn in 2008–2009, that made up the decline in output within a few months, and that has continued to expand, albeit at only moderate pace, since then”.

“They see an economy that has not experienced a significant recession for 20 years, that has strong banks and little government debt – and that debt remains AAA-rated,” he says.

Stevens explained that were the situation in Europe to worsen its impact on global markets would be felt in Australia in the same way that the collapse of Lehman Brothers in 2008 impacted on credit conditions, trade finance, share prices, and household and business confidence.

“There was a period late in 2011 where there was a genuine fear that this could happen again. Funding markets tightened up and effectively closed for many European banks. Inter-bank activity more or less ceased in Europe.

“The cocktail of sovereign credit concerns, large bank exposures to those sovereigns, possible bank capital shortfalls and prospective large debt rollover needs of banks, not to mention the unpredictable dynamics of the Greek workout, had everyone very much on edge,” he says.

Stevens says much more needs to be done to put sovereigns and banks onto a sound footing in the longer term.

“Interbank activity remains constrained and unsecured funding remains expensive for banks. It is noteworthy that large corporates can borrow more cheaply than can banks with higher credit ratings, such is the odium investors attach to banks (though this is not confined to Europe),” he said.

Despite these concerns, Stevens said foreign investors continued to view Australia as “quite open to them, and that, reflecting its economic circumstances, offers rates of return that are high by international standards, even though they are low by Australian historical standards”.

“They understand the potential returns on the mineral and energy wealth stored in or around the Australian continent, and that our terms of trade have over the past year been higher than at any time for more than a century. There has been increased appetite for Australian dollar denominated assets, particularly sovereign debt, and the Australian dollar has risen strongly, to be at its highest level in three decades,” he added.

However, he also highlighted the two-speed economy and different rates of growth potential for different sectors, calling it “structural change-inducing”.

This article first appeared on Property Observer.


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