Big rate cuts have helped improve housing affordability and are expected to boost residential construction later this year, the Reserve Bank of Australia says.

RBA head of the economic analysis department, Anthony Richards, says large declines in home mortgage rates had led to an improvement in housing affordability.

“It is quite clear that purchase affordability has recently improved very significantly in Australia”, Dr Richards said at the fourth annual Housing Congress in Sydney on Thursday.

“The recent sharp improvement in housing affordability clearly mostly reflects the sharp fall in mortgage rates over the past half year.”

Interest rates have hit a 45-year low after the RBA cut the official cash rate by 400 basis points between September last year and February.

Standard variable mortgage rates have fallen by about 375 basis points in that time, Dr. Richards said.

The average interest rate repayment on all home loans, including fixed rate mortgages, had fallen by about 265 basis points.

Falling mortgage rates had reduced have reduced the debt burden of households by about 5 per cent of household disposable income, Dr Richards said.

Admittedly, the effect on the net interest payments of the household sector – that is after we take account of the effect on the interest receipts of savers – is smaller”, Dr. Richards said.

“But there is still a significant stimulatory effect from lower interest rates.”

The softening of the Australian housing market had also served to improve housing affordability with overall housing prices falling by 3 per cent in 2008, a figure which Dr. Richards says is much smaller than the double digit falls in the US and UK.

He said Australia’s ability to expand the supply of housing would be one of the factors that affected housing affordability in the medium term, with the performance of residential construction expected to be an important influence on economic activity.

Source: The Australian Financial Review