Third interest rate rise likely next week - economists

RBA official says Australians can afford to service their mortgages at higher interest rates as experts tip another rate hike next week.

RBA deputy governor Ric Battellino is upbeat on the economy.

THE chances of another interest rate rise were boosted yesterday when a senior Reserve Bank official declared Australia's economy had entered a "new upswing" that would underpin growth for years.

RBA deputy governor Ric Battellino also told a housing conference in Melbourne that Australians could afford to service their mortgages despite higher house prices.

He said Australia's housing shortage was a big challenge for the economy but it was at odds with a high level of housing investment.

Mr Battellino said this was because a lot of that investment was going toward improving the quality of existing homes, replacing existing houses or building second homes or holiday houses.

The deputy governor acknowledged that many first- home buyers found it tough to enter the housing market but said people already in the market were able to cope with mortgage repayments better than Americans.

Australians appeared to spend less on non-housing consumption than Americans, which could partly be explained by lower health costs.

Mr Battellino said the US housing market was also more heavily geared than Australia's, which might be because Australians had a bigger incentive to pay down their loans with mortgage repayments for owner-occupiers not tax deductible here as they were in the US.

Dollar boosted

His bullish comments, which helped propel the Australian dollar almost US1 cent higher to US92.45, came as the Australian Bureau of Statistics revealed a jump in public sector building had lifted overall construction work a surprise 2.2 per cent in the September quarter.

CommSec analysts said in real terms, the value of construction work done in the September quarter was $39.63 billion, making the highest reading in records going back over 23 years.

Economists said the figures and the RBA deputy's comments signalled a third consecutive interest rate rise could be on the way next week and financial markets last night increased the betting for a 25 basis point rise from 68 per cent to 76 per cent.

"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 yet," said Mr Battellino.

"The global economy is clearly growing again after some very sharp falls in activity late last year and early this year."

Mr Battellino said the ratio of house prices to income was much higher now than 20 years ago, mainly because a fall in inflation had brought interest rates down and allowed people to take out bigger home loans without increasing loan repayments.