Expected 18 year run of growth to continue, RBA says

Reserve Bank of Australia (RBA) deputy governor Ric Battellino said on Wednesday a recent rebound in economic activity in Asia was positive for the nation, as it emerged from the global economic downturn.

"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," Battellino said during a speech in Melbourne.

It is now 18 years since Australia experienced negative year-end gross domestic product (GDP) growth.

"Over the next few years, Australia is also expected to see a further expansion of the resources sector, including the development of some very large gas projects," Battellino told delegates attending the 6th National Housing Conference.

In the speech, which economists described as very upbeat, he predicted mining investment - already at record levels as a share of GDP - to rise "substantially further".

"If this scenario eventuates, it will have powerful and broad-ranging implications for the economy," he said.

Demand for housing would be boosted by solidly rising household incomes and strong population growth, which would underpin immigration numbers.

As well, the construction industry was likely to face substantial competition for workers from the mining sector, which would also be "generally positive" for housing.

But he said while it was important to ensure an adequate supply of housing it was not true that investment in housing had been cut back.

"In fact, the opposite is true," he said.

"Over the past decade dwelling investment has been higher - around six per cent of GDP - than it has typically been in the past."

He said the apparent contradiction between a shortage of housing and high dwelling investment had arisen because a

lot of that investment was going into home improvements and extensions to primary residences.

Battellino noted concerns in the housing industry about the cost of new loans for and access to housing loans.

However, interest margins on standard housing loans had narrowed a little over the past couple of years while approvals of new loans remained relatively high, with housing credit growing at an annual rate of seven to eight per cent.

This indicated a degree of home buyer activity usually associated with a boom market, Battellino said.

As well, Australian households are able to sustain relatively large home loans because they spend less income on non-housing consumption that US citizens, and also pay lower health costs than the US, he said.

"Australian households therefore have greater capacity to service housing loans," he said.

RBC Capital markets senior economist Su-Lin Ong said the "upbeat" speech suggested the RBA could still hike the cash interest rate after its December 1 board meeting.

"The generally positive tone coupled with a view that the household sector as a whole appears in reasonably good shape in the early stages of the tightening cycle suggests that there is no strong argument for a pause at next Tuesday's RBA board meeting," she said in a statement.

Battellino said while the ratio of house prices to household income in Australia was higher than it was 20 years ago, this was largely as a result of a fall in inflation over the same period and lower interest rates, which allowed households to take out bigger home loans without increasing repayments.