The Australian real estate market has been the talk of the property market for some time now with many experts believing that Australian property prices are significantly overvalued. Whether or not property prices are overvalued in Australia is certainly a matter for discussion although the recent reduction in base rates by the Reserve Bank of Australia could serve to be a very unwelcome boost for the real estate market. How can a reduction in base rates be unwelcome for those funding property through finance?
The Australian economy has been one of the best performing in the world since the 2008 worldwide recession. Much of this impressive growth centres round the natural resources industry which has gone from strength to strength. Commodity prices in general have come under pressure of late which has led the Australian government to take pre-emptive action to protect the economy should it start to falter. The first stage in this action was the reduction in base rates to a historic low of 2.25% with the hope that cheaper finance will eventually filter through to the economy and help to avoid a full-blown recession.
In reality the Australian government has been very successful in pre-emptive moves to protect the economy in years gone by. It is this forward thinking strategy which has served the country well although there is certainly something of a quandary at the moment with the property market flying high.
Are we seeing the emergence of a property price bubble?
While some experts believe that an Australian real estate price bubble was already in place prior to this reduction in base rates, more experts are now citing their concerns. The mixture of expected weak economic growth in the short to medium term together with the spectre of dreaded deflation has prompted the authorities to react. There is no doubt that cheaper mortgage rates will fund demand for Australian real estate and push prices in some parts of the country to new all-time highs.
When you bear in mind that Australian property prices, according to the 2015 Fitch report, have increased by nearly 400% since 1997, there is certainly reason for concern. Indeed real estate price graphs for areas such as Sydney, Melbourne, Brisbane, Adelaide and Perth make good reading for investors but certainly seem to be suggesting a trend which cannot continue for much longer. We may well see an increase in short-term demand for property, with mortgage rates expected to follow base rates lower, but there are other concerns starting to emerge.
Household debt at uncomfortable levels
The average household debt across Australia as a percentage of disposable income is now at an all-time high of 150%. While a reduction in base rates will assist those looking to refinance their debts we are unlikely to see an increase in the disposable income to debt ratio which would indicate a reduction in spending on property. A suggestion that some property prices in Australia may be 49% overvalued, from a recent Deutsche Bank survey, are difficult to believe but any doubt about the value of Australian property will make some investors think again.
In many ways it is the household debt issue which will eventually hit the Australian property market. This kind of enormous investment cannot go on forever and indeed those hitting financial trouble will likely be forced to sell their properties and a small procession for the exit door could very quickly turn into a stampede.
It will be interesting to see how the Australian authorities react in the short to medium-term and indeed whether any further interest rate reductions are announced. This is perhaps the greatest challenge in recent times for the Australian government, an economy starting to slow, concern about deflation and lower financing costs fuelling an already red hot real estate market. At some point the property market in Australia will balance itself out but the higher the rise in the short term the greater the eventual fall when reality kicks in!