The Reserve Bank of Australia has chosen to keep interest rates at their record low rate of 0.10 per cent for March, but it could be forced to increase rates “sooner than expected”.
Australian home values surged 2.1 per cent during February, marking the biggest one month increase since 2003.
Recent housing data also shows it’s unlikely the housing rush will end soon, with loan approvals jumping 10.5 per cent in January.
Mortgage broking firm Mortgage Choice has also reported its highest number of home loan applications since 2017.
This is all posing a challenge for RBA Governor Philip Lowe.
While he has flagged rates won’t increase until it hits its 2-3 per cent inflation target, likely in 2024, the increasingly hot property market could trigger a change of heart.
“The Reserve Bank looks likely to find itself under property price pressure a lot sooner than it had expected,” Canstar’s group executive of financial services, Steve Mickenbecker, said.
“The Reserve Bank doesn’t expect to raise the cash rate for three years or more, but unless property prices can be slowed it will have to start looking for some way to apply the brakes.”
And while the RBA has previously been able to call on the lending regulator, APRA, to introduce lending caps on investment lending to cool the market, this new surge has been led by first home buyers.
Mickenbecker said this is creating the “perfect storm for house prices”.
“On the supply side, new listings through 2020 were well below the four preceding years and total listings now are also down as stock is absorbed before or as soon as properties hit the market,” he said.
“Owners are loath to put a house on the market even at high current prices, fearing they will miss the boat getting back in.”
At the same time, property demand is soaring higher as buyers worry about missing out and pile in to the market.
He said this is creating a “powerful psychological driver”, which when coupled with ultra-low interest rates and government incentives is forming a first home buyer and home builder rush.
“Arguably the result of slow supply and increased demand is a timing mismatch,” he said.
“New construction will lift national housing stock and first home buyers will be vacating rentals, which must eventually find their way onto the market in the face of likely continued slow population growth from reduced migration, student intake and tourism.
“But it is likely the supply will be in out-of-favour inner city apartment dwellings.”
And while market forces will ultimately soften demand, that will only come with increased listings.
Mickenbecker said this supply will have to come from investors forced to sell as their rental tenants decide to either move out of the inner-city or purchase a home.
“Investors can walk away with a tidy capital gain and no pressing housing need,” he said.
“Buyers will be feeling a lot of pressure before this all plays out and the Reserve Bank will be looking for a circuit breaker.”
RateCity.com.au research director said the lesson for prospective buyers is to keep a cool head and ensure they're not biting off more than they can chew when it comes time to sign on the dotted line.
“If you are looking to buy a home, don’t just work out the monthly mortgage repayments, look at how much debt you’re willing to take on,” she said.
“Interest rates are keeping mortgage repayments manageable now, but home loans are a 30-year commitment. The last thing you want is to be saddled with debt you can’t afford to repay in five- or ten-years’ time."
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