Will Fears of a Housing Bubble Impact Future Interest Rates?

Wednesday, April 2nd, 2014
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Concerns over Australia’s surging property prices could weigh heavily on the Reserve Bank’s decision to raise or reduce interest rates.

While keeping interest rates down will facilitate the Australian economy’s transition to more pluralistic growth in the wake of the mining boom’s demise, the RBA is also concerned that any further reductions will spur the formation of a bubble on the housing market, where prices have already surged in the country’s major cities as a result of the record low cost of borrowing.

When the cash rate was cut to the historic low of 2.5 per cent in August of last year, it also brought mortgage rates down to unprecedented levels, with certain non-bank lenders offering them to buyers for under five per cent.

This has served as a driving factor behind the recent surge in Australian housing prices, which have leaped by 10 per cent over the past year. In stand-out performer Sydney, they have risen by a stunning 15 per cent.

RBA Governor Glenn Stevens has endeavoured to put a positive spin on the rising prices, stating that they have spurred a spike in residential building activity which has brought approvals to their highest levels in a three decades. This has enabled Australia’s housing stock to catch up with the country’s rate of population growth.

Stevens also made the pointed observation, however, that housing prices can go down as well as up – a truism which is especially pertinent in market environments like the current one, where investors as opposed to owner occupiers are primarily responsible for credit growth.

Investors currently comprise over 40 per cent of all housing loan approvals in NSW, approaching levels last witnessed over a decade ago during the 2003 housing boom.

Pundits are now divided over the question of whether or not the RBA will keep rates low at the risk of further inflating the Australian housing market, in order to help the nation’s economy make its way through a difficult transition period.

Although a recent Bloomberg survey indicates the majority of economists expect a rate hike to be delayed until next year in order to prop up ailing growth and employment levels, one-third of economists see interest levels rising prior to the year’s end.

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