Michael Marquette of Marquette Turner Luxury Homes writes:
In raising interest rates yesterday by 0.25% the Reserve Bank of Australia has signaled that it is hugely concerned by the level of property prices in Australia. Without question prices for residential dwellings decreased since the beginning of the financial crisis. What is also without question is that properties under $600,000 AUD have been uncomfortably increasing in price throughout 2009.
There are many factors which have contributed to this situation and the Reserve Bank is becoming increasingly concerned that property prices are moving outside of World trends to a point where an eventual price bubble is predictable.
The First Home Owner Grant has fueled property prices and instead of making housing more affordable has done the reverse. The effect on the sub $600,000 AUD market is enormous and has the potential of returning to haunt first home buyers in the coming years – many of whom are highly leveraged and will not be able to easily sustain increasing interest rates.
The Reserve Bank in increasing interest rates is hoping that property prices will steady however the situation is far more complex. Construction in Australia has been at only half the level required for 5 years and with the population growing quickly the situation is becoming more urgent. Increased interest rates will act to keep construction levels low as developers steer away from high building costs.
So what is the answer? The Reserve Bank must balance the need for controlling property prices and increasing interest rates with the need to incentivize developers to build new dwellings which are urgently required across the nation. The balancing act that is required is extremely complex and will play out throughout 2010 and 2011.
One thing that is certain is that low levels of construction have greatly assisted in holding up Australian property prices. Add the First Home Owner Grant to the mix which has also acted to artificially hold up prices and the situation over the coming years becomes more and more complicated.
In the 5th Annual Demographia International Housing Affordability Study, Sydney was ranked as the 2nd least affordable major market after Vancouver, followed by San Francisco in 3rd place. Highlighting the Australian problem, Adelaide and Melbourne were tied as equal 12th least affordable, ahead of New York in 14th position and London in 16th.