The Governor of the RBA, Glenn Stevens, told a London audience overnight that he was not worried about Australia's housing market, correctly highlighting that there has been virtually no house price growth in Australia over the last year or so (only 1.2 per cent since January 2010 in the capital cities, which account for 60 per cent of all homes, and -0.3 per cent since January 2010 in the rest of state areas, which account for the remaining 40 per cent of homes). Governor Stevens also (indirectly) references RP Data-Rismark's findings that show that WA and QLD have been the two worst performing states.

Finally, he noted that Australia's "country-wide" dwelling price-to-income ratio is only around "4.5 times", which is "not exceptional by a global standard”.

Rismark is the only organisation to publicly produce such a metric, and our September quarter estimate of average national dwelling prices over average incomes was 4.4 time, and will be updated for the December quarter National Accounts shortly. See Governor Steven's quotes below:

"Well, let’s establish a few facts. Actually, for the past year or two, house prices haven’t done anything much at all. They’re up in some parts of the country, down in others and, interestingly enough, the two regions where house prices have been weakest are Queensland and WA [Western Australia]. Given the nature of the resources boom that’s building up, it’s hard to believe that they’re going to see chronic weakness over a long time. I think the story for recent weakness is probably that they’ve got some indigestion as a result of the previous upswing.

But, as we see that unfold, we continue to see arrears rates five on mortgages very low by global standards – 50 or 60 basis points.

So I’m not terribly troubled by – I don’t think we have huge rises going on. We don’t have a gearing up going on now. We’ve got quite modest growth in housing credit now for the past year or more. That all seems to me to be 10 consistent with a household sector that’s being more careful. It’s probably observed what’s happened in some other places in the world and thought, “Mm, you know, let’s not have that,” and people are being more careful as a result. And, of course, we do have a surge in income happening.

So, you know, that’s probably not top of my list of worries. I think there are significant issues to do with housing values, but I think they are as much social, really, as economic, and I won’t go into that today; there’s not time. But I think – the other thing I’ll say is that it’s quite often quoted very high ratios of price to income for Australia, but if you get the broadest measures, a country-wide price 20 and a country-wide measure of income, the radio it about 4.5 and it hasn’t moved much either way for 10 years. And that is higher than it used to be, but it’s actually not exceptional by a global standard as far as I can see." 

Then, Governor Stevens discusses Australia’s position at the moment.

"Australia sits in an interesting position here. Like our Asian neighbours we were affected by the events of late 2008. But the downturn was fairly brief. We were in a position to apply a liberal dose of stimulus to the economy, which was done in a timely fashion. The banks remained in good shape. Hence recovery began in the first half of 2009. A strong Asian recovery has also helped Australia.

As in other developed countries, our consumers feel the effects of higher commodity prices as a reduction in real income. But since Australia is also a producer, the big rise in demand for energy, resources and food is expansionary for the economy. In fact, with our terms of trade at by far their highest level, on a five-year average basis, in more than a century, these events are very expansionary indeed. A very large increase in investment in the resources sector is under way and has a good deal further to run yet.

Just recently, we have been experiencing growth close to trend, relatively low unemployment – about five per cent – and moderate inflation, about 2.25 per cent in underlying terms. In comparison with the experience of the past generation, that is a pretty good combination.

Looking ahead, our job is to try to manage the terms of trade and investment booms. Historically, Australia has often not managed periods of prosperity conferred on us by global trends terribly well. On this occasion, we have to do better. We have to take the opportunity to capitalise effectively on some very powerful trends in the global economy to which we are, almost uniquely, positively exposed.

A few things are working in our favour. One is that the exchange rate is playing a role of helping the economy to adjust to the change in the terms of trade in a way that it was prevented from doing on numerous previous occasions. Another is that, at least so far, households are behaving with a degree of caution, insofar as spending and borrowing are concerned, that we have not seen for a long time. Having taken on quite a degree of debt over the preceding 15 years or so, households have thought better of taking on too much more. They are saving more than at any time for 20 years or more. So are households in many other countries, of course, but our good fortune is to be making that adjustment against a backdrop of rising income.

We are now engaged in a national discussion about how to stretch the benefits of the resources boom over a long period, and how to manage the risks that it will bring. These are complex matters that involve a wide range of policy areas – macroeconomic, microeconomic, taxation, industrial and so on. But if that discussion can be conducted in a mature fashion, and followed up with sensible policies, then we have a good chance of leaving to the next generation a wealthier, more secure and more stable Australian economy."