- The economic recovery is on, and interest rates are low... good times?
- The pace of property price growth is "unsustainable", argue the pundits
- The timing of any interest rise or credit control will need to be carefully considered
Australia held the record for the longest period of unsustained economic growth among developed nations, from the aftermath of the 1991 recession (‘we had to have’) right up to the middle of last year.
29 years. The Netherlands was the former record holder, with 25 years.
Australia still does hold that record, of course, even though the run came to an abrupt end in mid-2020. It has since snapped back out of the pandemic-induced recession, and might be off on its next bull run.
Fuelled by generous economic stimulus, historically low-interest rates and the relative success with handling the coronavirus, the Australian recovery has – thus far- beaten all forecasts. And it has fuelled a property market that is growing its fastest since the 1980s.
The Reserve Bank has signalled, time and time again, that they will not be lifting interest rates until wages are rising at a rate that equates with price inflation in the 2-3% range.
We are some way off that, as the latest inflation figures are 1.1%, and wages only grew 1.5% in the last year. This is despite all the money being splashed around through the economy, and national budget deficits stretching out for at least another decade.
With interest rates so low, why not take on debt, one might ask? Governments, businesses and people alike are asking this question.
If we’re coming out of our first recession in three decades in a better position than most, what can hold us back?
Consider that someone can borrow $500,000 and only have to pay around $200 a week in repayments (interest-only loan, over a long period), then borrow away, some might say.
It would not take much of an interest rate rise to cripple many a household budget, and then there could be a world of pain.
Already, since the ending of JobKeeper, some markets are noticing a rise in mortgagee repossessions.
Some financial institutions are already taking it upon themselves to raise the rates they charge their own lenders. This is despite the fact that the rate the banks borrow from the RBA (the cash rate) is 0.1%, and likely to be that for some time.
Some commentators have already noticed this move.
“With Australian housing values moving through an eighth consecutive month of growth, reaching new record highs each month in 2021, the RBA is likely to be monitoring housing market trends closely, or more importantly, the lending behaviours that support market activity,” said Tim Lawless from CoreLogic, in an article.
“The pace of house price appreciation has slowed a little since growth rates hit a 32-year high in March, but with national home values rising 2.2% in May, the pace of capital gains remains unsustainably high.“
Notice the “unsustainably high” remark about the pace of change. While property prices may continue to rise, they surely can’t keep doing so at 2% a month.
While homeowners may be celebrating all this extra (paper) property wealth, and borrowing and spending up – which also helps the economic recovery – on the other side of the coin, properties are becoming more and more expensive for those trying to get into the market, no matter how low the interest rates are. Affordability will become an issue, if not already, and this will only slow the rate of price growth.
With all the new houses being built over the next few years, expect more supply to come onto the market too.
“Additionally, through the December quarter, the proportion of mortgages issued with high loan-to-income ratios and high debt-to-income ratios increased, as did interest-only loans and loans to borrowers with high loan-to-valuation ratios.
“Considering the sharper rise in investment lending since the December quarter, it is possible the proportion of these types of loans generally deemed ‘riskier’ has already lifted,” said Mr Lawless.
So far, the RBA is satisfied that lending standards have not worsened. But they are watching this closely.
Some form of tighter lending controls may be enacted, to try and dampen the market, if the RBA believes proper standards are beginning to slip.
Crystal ball time
Whatever happens, for some it’s now time to “make hay while the sun shines”, and for others, it’s “how on earth can I join the party?” Others might be thinking… “time to exit?” No doubt, the RBA will be cautious in its approach. Good advice for everyone perhaps.