Interest Rate Cut Increases Risk of Housing Bubble

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Tuesday, February 10th, 2015
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The Reserve Bank’s rate cut will increase the risk of a housing bubble, particularly in Sydney, economists warn.

HSBC’s Paul Bloxham and Daniel Smith expect record low mortgage rates to lift house prices even further in 2015, after strong growth in the past two years.

“We expect national housing prices to rise by seven to eight per cent in 2015, once again well ahead of household incomes,” they said in a new report.

“Given the recent RBA cut, the risk of a housing bubble is increasing, particularly in Sydney.”

The economists expect Sydney prices to rise by nine to 10 per cent in 2015, with a high chance of a price fall when rates do eventually rise.

Sydney prices have soared 33 per cent since mid-2012 and are rising at 13 per cent year-on-year, while national prices have risen 23 per cent in two-and-a-half years and are growing at an annual rate of eight per cent.

Those rises have come from a low base, however, after prices dropped during the mining boom’s peak in 2011 and 2012, the report said.

The RBA last week cut the cash rate to a new record low of 2.25 per cent, which has been passed on by most lenders, and another reduction is expected in the coming months.

That and strong foreign demand has boosted housing construction activity, which will help to address an undersupply. And Mr Bloxham and Mr Smith expect that activity to pick up strongly in 2015.

“Building activity is also booming, with national residential approvals reaching record highs of over 200,000 dwellings over the past year,” they said on Tuesday.

 

By Lucy Hughes Jones
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