Investors plunging into residential property have been warned by the Reserve Bank of Australia (RBA) that they are taking on risks when prices are already high and growth in rents has slowed.
Following October’s Board meeting, the RBA indicated that property prices had continued to grow into the September quarter.
What’s been driving prices?
The rise in house prices over the last two decades – most recently in Sydney – can be attributed to two key factors:
Low interest rates: A sustained period of low interest rates has enabled Australians to borrow more for a given level of income. Consequently, this higher borrowing has allowed Australians to pay more for homes.
Undersupply: Restrictive land supply policies coupled with high stamp duty and infrastructure charges have subdued the supply of real estate in Australia. Reflecting this, residential vacancy rates remain relatively low.
Please note: While foreign and SMSF buying is playing a role in some areas, it can be argued that their overall impact is small.
Tightening the reins: Macro-prudential policies are being considered
The RBA has indicated that it is in discussion with the Australian Prudential Regulation Authority (APRA) on steps that could be taken to ensure sound lending practices are maintained with a focus on investors.
This could involve limits on loan-to-valuation ratios, or more likely, measures that would force banks to either put aside more capital for loans to property investors or impose tougher tests when granting loans. We expect to hear more on these measures in the months ahead.
What about interest rates?
Despite strong gains in property prices, the RBA has indicated that interest rates will remain unchanged for now, adding that the most prudent course forward would likely be a period of rate stability.
At the moment, the RBA is reluctant to raise rates given uncertainty regarding the rest of the economy and the risk a rate hike would put upwards pressure on the Australian dollar, which is still too high for the RBA’s liking.
We expect that investors could see further gains in house prices in the short-term, but at a more modest pace. This trend is likely to continue until the RBA starts to raise interest rates (possibly around mid-next year).
As a medium-term investment, residential property currently looks somewhat less attractive. The total return over the medium-term is expected to be around 4 to 5% per annum. This is currently lower than shares and commercial property.
In saying this, over the very long-term (almost 100 years) residential property has provided a similar return as Australian shares; both have delivered around 11 to 11.5% p.a. to investors since the 1920s.
Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.