The RBA minutes, out today, talks to risks in the housing sector.
Recent data continued to suggest that there had been a build-up of risks associated with the housing market. In some markets, conditions had been strong and prices were rising briskly, although in other markets prices were declining. In the eastern capital cities, a considerable additional supply of apartments was scheduled to come on stream over the next few years. Growth in rents had been the slowest for two decades. Borrowing for housing by investors had picked up over recent months and growth in household debt had been faster than that in household income. Supervisory measures had contributed to some strengthening of lending standards.
Dwelling investment had rebounded in the December quarter; much of the strength had been concentrated in New South Wales. Even though building approvals had fallen significantly in recent months, the substantial amount of building work in the pipeline suggested that dwelling investment would continue to contribute to growth in coming quarters. Conditions in established housing markets had continued to differ significantly across the country. Over recent months, conditions appeared to have strengthened in Sydney and had remained strong in Melbourne; these cities had continued to record brisk growth in housing prices, and auction clearance rates had remained high. Housing loan approvals and credit growth had picked up for investors, primarily in New South Wales and Victoria. In contrast, housing prices and rents had fallen in Perth for two years or so, and apartment prices had declined in Brisbane.
Rural exports had grown strongly in the December quarter, reflecting strong farm production following favourable weather conditions in many areas over the second half of 2016. As a result of this and the higher prices for bulk commodity exports, there had been a trade surplus in the December quarter for the first time in almost three years. The current account deficit had narrowed to less than 1 per cent of GDP, the smallest deficit since 1980; the trade surplus was partly offset by a widening in the net income deficit as some of the increase in mining profits had accrued to foreign owners.
Household consumption growth, which had been relatively subdued in mid 2016, picked up in the December quarter, consistent with retail sales. Liaison with retailers suggested that recent trading conditions had been around average and household perceptions of their personal finances had also been around average.
The pick-up in consumption growth stood in contrast to the ongoing weakness in labour incomes, with the household saving ratio declining in the December quarter. Members noted that over the past two decades movements in the Australian household saving ratio had been much larger than those in other similar economies. One contributing factor was likely to have been that Australia had experienced a much larger terms of trade cycle than other developed economies with significant commodity exports. Differences in the evolution of household saving ratios across the states suggested that the terms of trade had played an important role in households’ saving and spending decisions.