There were two important charts contained in the speech by RBA Deputy Governor Philip Lowe today covering the resilience of our own economy, the productivity challenge, the balance in the housing market and the inflation outlook. Real disposable income per capita has been static since 2008, and rent inflation continues to fall. Both indicators of ongoing stress in the economy, especially since household debt is higher than ever, and we have a large share of housing in the investment sector, where we already know some households are in real-terms losing money each month.
This data partly explains the relatively low state of household finance confidence.
While we have done a pretty good job of adjusting to our changed circumstances, the not-so-good news is that growth in real income per capita in Australia has stalled (Graph 5). Indeed, average real income is no higher today than it was in 2008. This follows a 17-year period in which growth averaged a remarkable 3.1 per cent per year. During this earlier period, we benefited from: (i) strong productivity growth in the 1990s; (ii) a very large rise in our terms of trade; and (iii) favourable demographics, which helped increase the share of the population in paid employment.
The increase in supply now looks to be contributing to some moderation in the rate of increase in housing prices in these cities. It is also putting downward pressure on rents, with the CPI measure of rent inflation running at just 1.2 per cent in 2015, the lowest for 20 years (Graph 8). Whether or not these trends are maintained remains to be seen, and so we continue to watch developments in the housing market very closely.
The latest data from the RBA chart pack shows again growing debt, and the reduced debt interest burden thanks to ultra low rates. If rates were to rise by even a small amount, in the current low income and low rental environment, this will be a problem.
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