Reserve Bank Eases Fears of Home Buyers as Housing Market Shows Signs of Recovery

Strategic Insights -

The Reserve Bank of Australia sought to alleviate concerns of home buyers yesterday, stating that there is little chance of a major collapse in home equity despite low inflation, higher interest rates, and weak house prices. While acknowledging that household debt is still rising faster than income, the bank emphasized that a widespread fall in house prices is unlikely. In fact, new figures suggest that the worst of the housing slump could be over, with home lending trends improving for the third consecutive month. However, BIS Shrapnel, an economic forecaster, warned that Victoria's home-building industry will experience two years of decline, although house prices might not slide further.

Key Takeaways:

  • The Reserve Bank believes that there is no large-scale problem of financial distress or "negative equity" in the housing market.
  • Household debt is still rising faster than income, but the bank sees no widespread risk of defaults.
  • New figures show that home lending trends are improving for the third month in a row, with a 1.8 percent fall in loans approved in July.
  • Victoria's home-building industry is expected to face a 16.6 percent downturn in the current financial year, but BIS Shrapnel suggests that this will be followed by a recovery from 1997 to 2000.
  • The company's director, Robert Mellor, highlighted the importance of the 35-49-year-old demographic in determining market trends.
  • The Reserve Bank's bulletin noted that a large proportion of borrowers have substantial equity in their houses, reducing the risk of negative equity.

Statistics:

  • The number of loans approved fell by 1.8 percent in July, compared to a 24.5 percent jump in June.
  • Lending for new housing was down by 4.8 percent in July, while loans for established housing fell by just 1 percent in July.
  • Victoria's home-building industry is predicted to face a two-year decline, with a 16.6 percent downturn in the current financial year.
  • The expected recovery in Victoria's home-building industry will be driven by increased demand from 1997 to 2000, potentially recouping losses from the mid-1990s.

Sources:

  • "Reserve Bank eases fears on home buyers" by DAVID McKENZIE, CHRISTOPHER de FRAGA Canberra, circa October 1996.
  • Bureau of Statistics figures, circa October 1996.
  • BIS Shrapnel's report to the Victorian Government, circa October 1996.