With house prices rising at their quickest pace in three years, the central bank today gave another signal it was closely watching how the property market reacted to record low interest rates, cautioning home-buyers not to expect a repeat of the bumper house price growth of the 1990s and early 2000s. Housing
'Realistic expectations': The RBA has cautioned prospective home owners against expecting house prices to keep rising at their present levels. Photo: AFR
‘‘An increase in housing market activity more generally is not surprising given reductions in interest rates. However, it is important that those purchasing property maintain realistic expectations of future dwelling price growth,’’ the bank said in its half-yearly Financial Stability Review. Advertisement
‘‘In contrast to the decades leading up to the crisis – when dwelling prices grew rapidly in response to disinflation and financial deregulation – long-run future growth in dwelling prices might be expected to be more in line with income growth.’’
The comments are a reference to the fact that house prices surged over the 1990s due to one-off factors that made credit much cheaper.
What does it all mean? are we in a bubble, last week the headlines were 4 years of price rices & Sydney prices to rice 20%+? Does any one have a clue or is it all purely guess work?
What does it all mean? are we in a bubble, last week the headlines were 4 years of price rices & Sydney prices to rice 20%+? Does any one have a clue or is it all purely guess work?
They bring to mind the story about the little boy who cried "Wolf!"
Sadly that story did not have a happy ending. Guess we'll just have to see if the little boys (and girls) at the RBA can achieve a happier end result ...
What does it all mean? are we in a bubble, last week the headlines were 4 years of price rices & Sydney prices to rice 20%+? Does any one have a clue or is it all purely guess work?
They bring to mind the story about the little boy who cried "Wolf!"
Sadly that story did not have a happy ending. Guess we'll just have to see if the little boys (and girls) at the RBA can achieve a happier end result ...
Why do they need to do anything?
Just another day in the "property cycle" after all.
Nothing to see here.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
It is well known that both Australia and New Zealand practice the nasty act of land restriction policies on it’s people to drive up property prices and land banking. They also have some what unrestricted foreign investment. 30 years ago mortgages were 3 times earnings, now it’s around 8 times earnings. These markets are clear bubbles and many locals have given up buying because they fear a crash. In fact the higher percentage of people buying are investors.
TAKE THIS WARNING, Australian and New Zealand property are a high risk investment now. If regulation on land for building was simply relaxed it would crash over night. Prices are now stagnant in most cities.
RBA PLAYS DOWN BUBBLE RISK !!!
When ever a reserve bank plays the risk of something down, such as a bubble then you know that we are in a bubble. Because no government department speaks of such things unless there is a lot of talk about it in the market.
SMSF’s (Self Management Super Funds) are at high risk when the property market corrects. The extremely low interest rates have also eaten retirement savings. PIMCO is also worried since they have loaned banks a lot. 4 TRILLION OF DEBT in the Australian banking system. The government states they have small debt but they cover banks in case of default. Over 1.2 TRILLION is mortgage debt alone.
A SUB-PRIME problem worse than the USA. It’s estimated that 100,000 families maybe able to walk out on their mortgages because of fraudulent loan applications that brokers, agents and bank managers doctored. This was proven by a recent senate inquiry. A Royal Commission inquiry has been asked for but the government doesn’t want to let the cat out of the bag. Google this scary hidden secret.
True unemployment at around 10% (Roy Morgan report which is well respected in Australia) placing a lot more stress on mortgages.
Record low interest rates yet locals are not buying new property. They know it’s a bubble, this maybe argued but if you look at the states you will see locals have been replaced by foreign investors. The Australian government is trying to get people to build new homes with low rates, but more homes will mean the supply side increases, and with property markets such as Melbourne now completely stagnant or trending down this sounds alarm bells. In fact Melbourne is at extreme high risk as it accounts for over %35 of all new stock coming onto the Australian market.
Look at rent yields, still extremely low compared to house prices, a very poor return on investment, everyone knows it’s cheaper to rent than buy and the expert investors would never take on a investment such as property to rent out with such poor returns when other investments show much more promise. At the average price of 585K for a home with returns in rental most often not even covering interest repayments it’s a poor investment.
The mining industry has reached it’s peak in Australia. At the time it was booming so much money was wasted going into real estate as government restricted supply and affordable supply. Now that steam of cash from the mining days is over, BHP has just warned to expect lower returns today. All this of this means the cash cow that fueled the property boom is over.
The Reserve Bank of Australia urged the nation's lenders to maintain loan standards as record-low interest rates spur households' investment appetite.
The RBA has lowered borrowing costs by 2.25 percentage points in an almost two-year easing cycle to a record low of 2.5 per cent, to help offset the drag on the economy from a high currency and boost industries including construction as mining investment wanes. The rate reductions have fueled the property market, with prices in Sydney jumping 8.3 percent so far this year.
Australian employers must contribute 9.25 percent of workers' salaries to an authorized pension fund, driving growth of the country's retirement savings system to $1.6 trillion. Savers, some dissatisfied with the fees charged by professional managers for the returns they deliver, have pumped $506 billion into Self-Managed Superannuation Funds, or SMSFs, the largest piece of the pension pie.
Australia's household debt-to-income ratio stands at 147.3 percent, compared with a record 153 percent in 2007, RBA data show. That's higher than the 133 percent Americans accumulated at the peak of the US subprime mortgage boom, according to the Federal Reserve Bank of San Francisco.
Housing across Australia's major cities could rise as much as 11 percent on average in 2014, according to SQM Research Pty, which assumes no more than one 25 basis-point rate cut. All of Australia's major cities will see increases, except Canberra, which is expected to record declines of as much as 4 percent, the Sydney-based property researcher said in its Housing Boom and Bust Report.
Commonwealth Bank, Westpac, ANZ and National Australia Bank reported $13 billion combined profit for their latest six-month results, about 10 per cent higher than the previous half, the RBA said. Revenue growth of 4 per cent was slightly lower than in recent years, reflecting slower growth in net interest income.
The RBA said that Australian banks' loan performance has continued to improve in New Zealand, as rural and housing market conditions have continued to strengthen there. It noted the Reserve Bank of New Zealand's decision to modestly increase capital requirements on residential mortgages and restrict banks' new mortgage lending at higher loan-to-valuation ratios.
The Reserve Bank of Australia is warning property investors not to expect the sort of price growth that happened in previous booms.
It says people are exposing themselves to more risk in property investing, particularly within the self-managed super fund sector.
“It is important that those purchasing property maintain realistic expectations of future dwelling price growth; in contrast to the decades leading up to the crisis – when dwelling prices grew rapidly in response to disinflation and financial deregulation – long-run future growth in dwelling prices might be expected to be more in line with income growth,” the RBA writes in its Financial Stability Review.
It highlights New South Wales as a market particularly dominated by investors with 40% of home loans going to investors.
“The increase in investor activity has been associated with a recent pick-up in Sydney housing price growth and reports of sale prices exceeding price guidance and valuations by wide margins,” the report says.
It says increased speculation and borrowing by self-managed super funds for property investment presents risks not previously seen in Australia.
“One risk of the increase in property investment by SMSFs is that at least some of it is a new source of demand that could potentially exacerbate property price cycles. It also raises consumer protection concerns in the event SMSF members are exposed to greater financial risks than they envisage,” it says.
“There is also evidence that SMSFs have been a large part of the recent demand by retail investors for the non-common equity capital being issued by banks, as well as hybrid securities more generally.
These instruments attract a high yield as they combine features of debt and equity, and are also quite complex products that carry higher risk than more traditional debt securities.
It is therefore important that these risks are adequately communicated to, and understood by, the purchasers of these products”
There has been a rise in lending to SMSF by smaller lenders and mid-tier banks which is exposing the lenders to higher risks.
“The potential for a further increase in property gearing in SMSFs is a development that will be monitored closely by authorities for its implications both for risks to financial stability and consumer protection.”
By Jonathan Chancellor Thursday, 26 September 2013
The Reserve Bank of Australia has advised property investors to be “realistic” about price rises in their forecast new era of slower price growth.
The long-run future growth in dwelling prices might be more in line with income growth rather that hot to trot.
The RBA noted increases in investor activity had been evident in the recent pick-up in Sydney housing price growth which had been accompanied by reports of sale prices exceeding price guidance and valuations by wide margins.
It added the increase in housing market activity was not surprising given reductions in interest rates.
"However, it is important that those purchasing property maintain realistic expectations of future dwelling price growth; in contrast to the decades leading up to the crisis – when dwelling prices grew rapidly in response to disinflation and financial deregulation – long-run future growth in dwelling prices might be expected to be more in line with income growth."
Another words temper the current rush of buyers into the property market which is creating pockets of price silliness.
It noted the increase in investor activity in New South Wales appeared to have been particularly sharp with investor housing loan approvals accounting for around 40% of the value of loan approvals in NSW, a share last recorded in 2004.
The percentage dominance had coincided with the decline in first home buyer activity which has dropped from well below normal levels given the redirection of government subsidies away from established to new homes.
Just whether the RBA's worldly warnings are duly noted and ignored by the investor market will be worth watching, especially as landlords are facing a reduction in rental returns given the shifting sands of supply and demand.
It could be argued the market is already doing the RBA's work with Residex reporting Sydney unit rents are down 3.85% in the year to August from $520 a week to $500.
Melbourne unit rentals were down 6% to $385 a week. And Canberra's unit rentals fell 12% over the year to $425 a week. Brisbane's rents down 6% to $375 a week. Perth's weekly rent of $430 a week was off by 8% according to Residex.
Nationally unit rents fell over the past year by 5.8% to $400 a week, while house rents were steady at $405 a week.
Ofcourse much goes to the intent of the investors. Australia already has 1.7 million investors, most of whom have just the one investment property, and with some two thirds negative gearers.
Jonathon Mott, the UBS banking analyst, issued an interesting advisory note yesterday titled Investment Property – Speculators, spivs and tax dodgers?
He went on to suggest a high proportion of investment properties are purchased for expected capital gains (speculation) and tax minimisation (tax dodgers), rather than for rental income as seen in other countries.
Mott suggests the extraordinary leverage of Australian property investors is either the result of a national aversion to paying tax or a greater culture of speculation than other Anglosphere nations.
He says the significant growth in negatively geared investment property over the last 20 years should be of concern.
"While unemployment is low, investment property owners can afford to carry the negative cash flow, especially as they are rewarded with the ability to split the costs with the Government and they anticipate future capital returns."
Mott then posed the question: "But what happens if the unemployment rate rises further?"
There is a lot of talk in the media at the moment about a potential bubble. Its probably because not many were really anticipating these heavy price increases we have seen this year. Personally I was expecting a rather flat market, maybe slightly higher due to lower rates but certainly not this.
I have a lot of acquaintances that were going to upgrade/upsize their properties or get an investment unit that are now waiting it out because they simply don't want to be pulled into the hysteria. I think that if we were not in a bubble before we most certainly are now. Im going to give until early next year at least to see if it settles down before I hop back into the market.
With the cheapest mortgage rates in history fuelling double-digit house price inflation in Australia’s largest city, Sydney, the Reserve Bank of Australia has seen the writing on the wall.
It is clear the central bank is increasingly exercised about the prospect of “imbalances” (aka bubbles) emerging in Australia’s highly-leveraged housing market. As it should be.
In its semi-annual Financial Stability Review published on Tuesday, the RBA has bluntly warned banks that it is “particularly important” they maintain “prudent risk appetite and lending practices, especially in the current low interest rate environment”.
New research from RateCity has revealed that the share of lenders offering loans that require ultra-low deposits of 5 per cent or less has increased from 49 per cent in 2010 to 73 per cent today.
The RBA has also embarked on its first attempt to “jaw-bone” realism into the expectations of ebullient buyers in this part of the housing cycle.
According to the latest index information from RP Data, Sydney house prices are surging at a 13 per cent annualised pace in 2013. In absolute terms, they are 9.2 per cent higher over the first nine months of the year.
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