Your house is safe, RBA says

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Your house is safe, RBA says

By Chris Zappone

Australia's house prices will hold up better than those overseas, despite the slumping economy, the Reserve Bank said, largely because of the quality of the loans underpinning the market.

"We continue to believe that the market here will hold up better than overseas,'' RBA deputy governor Ric Battellino said in a speech to the Urban Development Institute of Australia in Brisbane.

"There are a number of reasons why this is likely to be so, but perhaps the most important is that we did not have the same deterioration in lending standards that occurred elsewhere.''

"By and large, the great bulk of Australians who took out housing loans have been able to afford the repayments,'' he said in a speech that also alluded to the economy falling into recession.

With fewer defaults knocking values down, Australian housing prices only dipped 3% in 2008, compared with the 20% falls seen in the US and Britain, he said.

In addition to higher lending standards and the absence of the sub-prime mortgages which imploded in the US, there is also a shortage of available homes in Australia, helping to keep demand high, industry analysts say.

The National Housing Supply Council released a report this month estimating an 85,000 house shortage in Australia at June 2008. Fears about the economy and job security have put a lid on further home buying, although the number has increased in recent months.

Lending rates, though, have also fallen, stoking demand. HSBC, hoping to win over rate-shopping first home buyers as customers, today unveiled a variable mortgage today with a 3.99% introductory rate, claiming it to be the lowest since the 1950s.

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New home sales grew by 3.9% nationally in February 2009, the Housing Industry Association said yesterday, the second consecutive monthly increase.

Mr Battellino said that in spite of the slumping economy, the 90-day arrears rate on housing loans is only 0.5% "which is broadly in line with its long-run average'' but well under countries like the US and Britain.

Arrears, or overdue debt, may well rise as unemployment ticks up and more households have trouble servicing their loans, he predicted.

Unemployment, currently at 5.2% is expected to zoom to "at least'' 9% by the end of 2010, according to JP Morgan.

"On the other hand, the very large reduction in interest rates has greatly reduced the debt servicing burden of households.''

The RBA cut the interest rate to 3.25% in February from 7.25% in September.

"On an average-sized mortgage, loan repayments are now $7000-a-year less than they were six months ago,'' Mr Battellino said. "This is a very large reduction, equal to about 8% of average household income.''

Investors and economists are divided over whether the RBA will cut interest rates when it meets again in April, and if so, by how much.

Economists surveyed by Bloomberg expect a 50 basis-point cut, while the market forecasts a 25 basis-point cut, according to Credit Suisse.


Mr Battellino said that after the cuts the RBA has already made "the cash payments involved in servicing a housing loan are now not much more than those involved in renting''.

Adding the first home buyers grant into the equation had attracted a lot of first time buyers into the market, he said.

"These measures will go a long way to offsetting the negative influences on the economy coming from abroad, but the reality is that we cannot fully insulate ourselves from what is happening elsewhere in the world.''

"As such, GDP is likely to fall in 2009.''

Fourth quarter gross domestic product contracted by 0.5% last year, suggesting the first quarter of this year may also shrink. A recession is typically defined as two consecutive quarters of GDP falls.

After the speech, Mr Battellino said, "I think it's likely that it further falls in the next few quarters,'' Reuters reported.

It was the first public acknowledgement by an RBA official that the economy was likely to contract this year.

"The possibility of further negative quarters of growth and a technical recession look to now be the RBA's base case scenario,'' RBC Capital Markets economist Su-Lin Ong wrote.

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