Thursday, Anthony Richards, Head of Economic Analysis Department at the Reserve Bank of Australia said the recent significant declines in the cash rate had positive effects on the Australian economy and the household sector. The fall in cash rates improved household cash flows as well as housing affordability for people paying mortgages or contemplating home-ownership.

Though home building is likely to remain weak in the near term, there are a number of factors that could support activity over the medium term, stimulating the broader economy, Richards added. He noted that there has been a considerable degree of consolidation since the housing boom slowed in 2003, which would ultimately reduce the vulnerability of the household sector in the current slowdown.

In the 4th Annual Housing Congress in Sydney, Richards said the modest decrease in Australian housing prices last year was much smaller than the double digit falls seen in US and UK. At the same time, the falls in housing approvals and in broader measures of economic activity in Australia have been smaller than the declines seen in many other countries.

Furthermore, there are a number of reasons to think that outcomes here might remain better than elsewhere, Richards added.

In Australia, lending standards were tightened, with a significant shrinkage in the amount of low-doc and non-conforming lending. Banks are indeed testing the ability of borrowers to continue servicing their loans if interest rates were to rise considerably. Richards stated, However, overall, I suspect that the risk of non-performing loans increasing to the extent seen in the United States is low.

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