Australian House Prices Surge, RBA Expresses Concern for the Property Sector
Since the onset of the global economic crisis, housing bubbles and crashes in property markets have plagued many nations, including Spain and Cyprus. Last year fears that the UK’s housing market was overheating led to bets that the Bank of England (BoE) would have to increase interest rates to cool the situation, but in 2014 it’s Australia’s property sector causing concern.
While property prices in some areas remain fairly static, regions like Sydney and Melbourne have witnessed a notable spike in values.
In recent months the problems facing Australia’s housing market have come to the forefront, and the Reserve Bank of Australia (RBA) has added its voice to the growing murmurs of discontent.
Following the central bank’s last policy meeting, RBA Governor Glenn Stevens referenced Australian property in his accompanying statement, asserting; ‘Interest rates are very low and have continued to edge lower over the past year or so as competition to lend has increased. Investors continue to look for higher returns in response to low rates on safe instruments. Credit growth is moderate overall, but with a further pick-up in recent months in lending to investors in housing assets. Dwelling prices have continued to rise.’
This brief inference was backed up by a speech given by Luci Ellis – head of the RBA’s Financial Stability department.
Ellis intimated that the low interest conditions fostered by the RBA for the support of other areas of the Australian economy have led to a surge in property investment and a jump in prices.
Property investment currently accounts for almost 50% of new home lending, leading Ellis to comment; ‘That share is noticeably higher than rental housing’s share of the housing stock, even allowing for a possible faster rate of churn in investor loans. Obviously that can’t continue forever.’
She added; ‘Part of the anticipated effect of monetary policy is to induce more construction activity. Higher prices are the incentive to get that expansion, which is indeed happening. But it is worth noting that the vast bulk of that new borrowing is to purchase existing properties.’
Australian Dollar (AUD) Weakness Could Drive House Prices Higher
With the situation already causing concern among policymakers, investors and the general public, any developments which could exacerbate house price gains wouldn’t be well received.
Unfortunately, the recent slide in the Australian Dollar (AUD) exchange rate could do just that.
A variety of factors led to the Australian Dollar to US Dollar (AUD/USD) exchange rate trending above parity for the first half of the year, putting pressure on Australia’s exporters and undermining the nation’s economic recovery. As a consequence, the RBA has made repeated attempts to talk the Australian Dollar lower by asserting that it remains high against the US Dollar (USD) by ‘historical standards’.
While the central bank’s jawboning had comparatively little effect, the Australian Dollar has recently been stuck on a downtrend as a result of falling commodity prices – particularly the sell-off in iron ore and crude oil.
In the last three months alone the AUD/USD exchange rate has fallen from 94 US cents to 86 US cents.
Although the RBA may be happier with the current exchange rate, it could have an unwanted side effect in the form of increased foreign investment.
Foreign Investment Could Drive Australia’s Property Values Higher
A softer ‘Aussie’ makes Australian property more affordable to overseas investors and may cause a continuation in the price gains recorded in areas like Sydney and Melbourne.
Although the RBA maintains that the level of foreign investment in Australian property isn’t serious enough to warrant action, there are holes in the methods used to calculate these figures and there is a proportion of foreign investment in residential properties which is unaccounted for. Popular emigration destinations like Melbourne, Sydney, Perth and Brisbane are particularly prone to attracting foreign investors.
Recent data compiled by the Australian Property Institute (API) showed that 96% of industry experts consider foreign investment a major cause of the increase in property prices in Sydney while 95% believe the same to be true in Melbourne.
A by product of the property investment (both foreign and domestic) is the creation of a considerable amount of debt. The national housing Debt:Income ratio brushed record highs recently, and the level doesn’t reflect the current pace of economic activity or housing supply – the main issue causing the RBA sleepless nights.
Policymakers have expressed the intention of tightening the regulations around foreign investment, but if the Australian Dollar (AUD) continues to fall, the prospect of a more lucrative investment will still draw investors.
Could Australia’s Housing Bubble Burst?
With supply and demand unlikely to catch up with each other any time soon, Australia’s housing boom could continue in the medium term – adding to risks that the bubble could burst.
The latest Australian Home Loans data showed that while the number of approved loans did slip for a second month, the value of the loans is on the increase as a result of the rising house prices. Total housing finance increased in value by 2.3% in September on a seasonally adjusted basis.
RBA to Take Action?
While the RBA has insinuated that action will be taken to restrict lending, many industry experts are concerned that the move would mask rather than solve the problem.
As stated by economist Savanth Sebastian; ‘There is still ongoing strength in the housing sector in terms of a lift in the supply of housing. That lift in property prices is raising the average loan size. In terms of what the Reserve Bank can do to blunt that investor market without seeing a substantial pullback in the housing market is an ongoing question. You’ve got such uncertainty around business investment, so you need the housing sector to drive growth.’
It is believed that the Reserve Bank of Australia, in conjunction with the Australian Prudential Regulation Authority (Apra), will outline new lending regulations before the close of 2014.
Until then the Australian housing market is likely to stay hot – particularly if the Australian Dollar (AUD) continues on its downtrend.
On Tuesday further Australian housing data showed that house prices in the nation were up 1.5% in the third quarter of the year. While this was a slightly slower pace of house price growth than recorded in the second quarter, house prices were up 9.1% on the year – considerably more than the 8.8% annual gain anticipated.
Sydney contributed the most to the house price increase, with the index for the city up 2.7% on the quarter.
The Australian Dollar has the potential to end the week trending in a weaker position against the US Dollar. While economic reports for the US have been in short supply this week, the nation is set to publish retail sales figures on Friday. A gain in sales would support the opinion that the US economy is strengthening and would decrease demand for higher-risk currencies like the ‘Aussie’ (AUD).
Australian Dollar (AUD) Slides on Intervention Hints
On Thursday the Australian Dollar (AUD) exchange rate softened as the Reserve Bank of Australia’s Deputy Governor insinuated that the central bank could intervene in the currency market in order to push the value of the ‘Aussie’ lower.
When speaking of driving the Australian Dollar lower Christopher Kent asserted; ‘We haven’t ruled it out. It’s still there as an option, if needed.’
The AUD/USD exchange rate fell to a low of 0.8668.
