Tough judgment needed on thriving residential market

Up until a year or so ago, many commentators were concerned about Australia's stagnant housing market, which was regarded as one of many factors contributing to the sluggish Australian economy. The housing market has since staged such a recovery that many pundits are speaking about a housing bubble just waiting to explode. In some places, house prices are now well above their levels of a year ago.

Up until a year or so ago, many commentators were concerned about Australia's stagnant housing market, which was regarded as one of many factors contributing to the sluggish Australian economy. The housing market has since staged such a recovery that many pundits are speaking about a housing bubble just waiting to explode. In some places, house prices are now well above their levels of a year ago.

In a recent report by NAB, economists forecast capital city house prices would rise 3.5 per cent in the year to September 2014 and 3 per cent in the year to September 2015. Others expect much larger increases, with a few looking for double-digit growth.

Many things are contributing to the conditions for flourishing residential markets. Low interest rates mean a reduction in monthly mortgage payments, which supports higher private consumption and encourages home purchases because buying becomes cheaper than renting. Also, a low interest rate environment generally leads to lower returns on other financial assets, making real estate investment more attractive. Thirdly, there are not enough homes to tackle the ongoing housing shortage, placing pressure on demand.

Prospective buyers/investors must determine how sustainable this price growth is, considering whether house prices are being held up by low interest rates, and thus will tumble when rates start to rise, or if there are other fundamental drivers.

The housing recovery is likely to continue, but how quickly and for how long is hard to predict.

Concerns that the market is heading for a new bubble are perhaps premature at this point in the recovery cycle. While price increases have been broad-based nationally, they have generally risen most where their decline had been the strongest, suggesting prices are still in the catch-up phase. The impact of higher mortgage interest rates on housing market activity and house prices is also considered to be somewhat mitigated by the positive effects of a better economic outlook on confidence and credit conditions.

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