In my previous articles, I’ve mentioned how expensive it was/is to live in Melbourne – the world’s best city. Home buyers constantly moan about the inability to purchase homes to start new families, instead having to endure the dissatisfaction of renting someone else’s dream. I preach the same message to my inner circle of friends, and to just about anyone who would listen. But being just one person in a city of 4 million, my voice doesn’t travel very far and isn’t usually heard by the masses.
My voice has finally been heard – albeit indirectly – but I’ll take it as a win anyway.
Recent press articles have been filled with commentary on the Australian housing situation and how expensive housing has become. No, not just expensive, but really really expensive. Surveys of global house prices regularly lists property values in Australia as being in the top 10 most expensive, and it has been like that for a while.
Hopefully that is all starting to change, because the normal Australian finally has the sympathy of the bigwigs at the Reserve Bank of Australia (RBA) – the pre-eminent financial authority in Australia.
In their bi-annual review on the financial stability of the Australian economy – aptly named Financial Stability Review (FSR), they have pointed squarely to the cause of the overpriced housing market, and have blamed the rapid rise in house prices on the ‘unbalanced market skewed towards investor investments’.
On Saturday afternoons when I’ve got spare time, I tend to wander down to auctions just to get a feel of how the property market is doing. What I see are not your typical young families looking to get their first foot into real estate; no, the crowd consists of burly businessmen looking to develop towering apartments to get the best bang for buck.
The numbers reflects this sad fact as well; RBA has reported that credit for investment properties rose 0.8% in August 2014, or 9.2% when compared to August 2013. This rapid rise in investment credit hasn’t been seen since March 2008, and isn’t looking likely to stop in the near future.
In the same FSR, the RBA’s solution to suppress this rapid growth in investor credit is by introducing ‘macro prudential policies’, that is to implement broad measures of government policies to discourage investors from overloading on loans and driving up property prices.
The main aim is to remove the competition from property investors, and hopefully drive down property prices so that it will be more affordable for the First-home buyers.
At this point, no one knows exactly what those control policies are, or when it will take effect. Market commentary suggests that the most likely controls are going to be on :
- adjusting deductibility rules around negative gearing on investment loans
- stricter bank’s lending criteria on loan applications
- bigger loan to valuation ratio (LVR) requirements on investment properties
In my household, my parents believe that property prices only goes in one direction – UP. I don’t blame them because it was true, and to a certain extent it is still true. As the below chart shows, house prices have been going up since my parents entered the workforce in the 70s. And because it is all they have come to know in their lifetime, it is then no surprise that this bullishness on house prices is permanently ingrained in their minds.
As we strive to be better financially educated, it is therefore important to note that prior to the property boom in 1950s, prices didn’t move that much – in fact it stagnated sideways for about 60 years. If my parents were born and worked in that time period, then their bullishness on property would be very different.
I’m sitting on the fence as to what property prices would do from this point onwards. As a property investor myself, I do hope that UP is the direction that property prices will head – but the bear in me worries that this latest FSR is the start of something sinister on property prices.