Battellino says Australian economic ‘upswing’ to last years

SYDNEY: Australia’s economy has entered a “new upswing” that will last for several years, helping the nation’s households fund mortgage costs, said Ric Battellino, deputy governor of the central bank.

The currency rose as investors increased bets the Reserve Bank will raise interest rates next week for a record third month after Battellino told a conference in Melbourne on Nov 25 that it’s “reasonable to assume we will see this growth extended for a few more years yet”.

The nation’s economy skirted the global recession amid rising consumer spending and demand for exports from Asia, extending its run of annual growth to 18 years. Economists surveyed by Bloomberg predict Reserve Bank Governor Glenn Stevens will increase the benchmark lending rate by a quarter percentage point on Dec 1 to 3.75%.

Australia’s economy has held up “much better than had been expected earlier in the year,” Battellino told a national housing conference on Nov 25.

The Australian dollar rose to 92.52 US cents at 1.33pm in Sydney from 91.96 cents just before the speech was released. The two-year government bond yield gained four basis points to 4.45%. A basis point is 0.01 percentage point.

Investors are also betting there is a 74% chance Stevens will increase the key rate by a quarter point next week, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 11.55am on Nov 25. Prior to the speech, there was a 62% chance of an increase.

A report published earlier showed the number of jobs available for skilled workers rose 2.4% in November from October, adding to signs that the economy is strengthening.

Governor Stevens raised the overnight cash rate target by a quarter percentage point in October and this month, becoming the first policy maker in the world to raise borrowing costs twice this year. Israel’s Stanley Fischer has also raised borrowing costs twice.

Stevens will raise the benchmark rate to 3.75% on Dec 1, according to 18 of 20 economists surveyed by Bloomberg. That would be the first time the bank has raised borrowing costs at three successive meetings.

“It is now 18 years since Australia has experienced a negative in year-ended gross domestic product growth, a very prolonged expansion,” Battellino said. “With the economy having only recently entered a new upswing, it is reasonable to assume that we will see this growth extended for a few more years yet.”

GDP rose 1% in the first half of the year, and is forecast by the Reserve Bank to gain 3.25% next year and in 2011. Third quarter growth figures will be published on Dec 16

Battellino said on Nov 25 that Australian households have a larger capacity to sustain higher house prices when compared to incomes than households in countries such as the US.

“Australians seem to spend less of their income on non-housing consumption than is the case for US households, with a significant part of this difference explained by lower health costs,” Battellino said. They “therefore have greater capacity to service housing loans”.

A quarter-point increase in borrowing costs next week would add about A$50 (RM..) to monthly repayments on an average A$300,000 home loan.

House prices in Australia jumped 8.4% in the six months through September, stoked by the central bank’s decision to slash the benchmark lending cost in April to a half-century low and government grants of as much as A$21,000 to first-time buyers.

“It is certainly the case that the ratio of house prices to incomes in Australia is higher now than it was 20 years ago,” Battellino told the National Housing Conference.

“However, this is largely explained by the fact that the fall in inflation over that period has allowed nominal interest rates to cycle around a lower average level now than was the case earlier. That is, lower interest rates have allowed households to take out bigger home loans.”

Another “plausible” explanation for why the ratio of house prices to incomes in Australia is higher than in the US is that the Australian population is more concentrated in a few large cities, where prices are higher, even relative to income, Battellino said.

The level of gearing in Australia’s housing market is also lower than in the US, he said.

“This may reflect the fact that Australian households are more active in paying down their loans after buying a home, possibly because owner-occupied mortgage interest rates are not tax deductible here as they are in the US.”

Concerns that the global financial crisis will squeeze access to mortgage funding in Australia appear unfounded, Battellino said.

“Margins on standard housing loans have, if anything, narrowed a little over the past couple of years, even for the major banks,” he added.

Two years ago, the interest rates charged by banks on new variable rate housing loans were about 190 basis points above their cost of funds. The gap is now “slightly narrower”, Battellino said.

“Housing credit is growing at an annual rate of 7% to 8%, a pace which is more than adequate to fund the new investment in housing that is needed,” he said. – Bloomberg LP

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