RBA Insists No Imminent Housing Sector Meltdown in Australia

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By Erik Pineda | June 26, 2012 6:22 PM EST

The Reserve Bank of Australia (RBA) sees no reason for alarm amidst observations by some economists that the country's housing sector could witness the same meltdown that humbled the U.S. economy in 2008.

According to RBA Assistant Governor Guy Debelle, he could not even pinpoint solid signals that Australia's housing market could be flirting with disasters amidst indicators in the past results that building activities in the sector have become sluggish.

Home sales were also at levels that economists said seemed inconsistent with the stimuli intended by the RBA board when it rolled out rate reductions since last year, bringing down the country's borrowing cost at its present level of 3.5 per cent.

But as insisted by the RBA earlier this month, the domestic setting is generally healthy, with expansion on the horizon and inflation levels largely staying on the manageable bandwidth.

The mining boom has been fuelling the economy but worries confined mostly outside of Australia were factors that the RBA considered when it decided to push back the cash rate in two successive months.

In fact, the international events were more worrisome on his part, according to Mr Debelle, than whatever challenges that exist back home.

The slowdown in China's economy could impact on Australia's commodities shipments and the worsening credit crisis in Europe could restrict financial inflow into the country, developments that Mr Debelle said were being closely monitored by the RBA.

He admitted though that while the RBA has been on its toes to offset any spillovers coming from Europe, how it would play out in the months ahead is still anybody's guess but with the International Monetary Fund (IMF) assuring earlier this year that the worst case scenario in the region may have been averted.

But the Australian situation, specifically its housing sector, seems to court imminent disaster, with economists asserting that the industry's recent indicators pointed to the presence of a bubble that is ready to burst anytime soon.

Business Day quoted U.S.-based magazine, The Economist, as saying that Australia's home prices were grossly overvalued when compared to the renting levels prevalent in the country.

The same inconsistency was cited by economist Dean Baker, who warned two years ago that the Australian housing market "looks like a bubble to me."

"The most obvious reason is that there is no remotely corresponding increase in rents, suggesting that it is not the fundamentals of supply and demand in the housing market that is driving prices," Mr Baker was quoted by Business Day as saying on Tuesday.

Local economists, however, argued that if indeed there was a problem in the sector, the Australian economy offers a robust firewall that could prevent a collapse similar to what Americans have seen in 2008.

Quoting industry experts, Business Day said Australia is amply protected by its healthy employment condition and lenders' stringent vetting mechanism for loan applications, which should ward off runaway accumulation of bad loans and its immediate aftermath, foreclosures.

On its part, the RBA said that current situation in the market suggests that trouble is out of sight in the immediate future as Mr Debelle pointed out that no oversupply in the sector is seen so far, household debts remain in the manageable sphere and overdue mortgage accounts were at the minimal.

"This (housing risk) is not something that keeps me awake at night," Reuters reported Mr Debelle as saying on Tuesday.

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