Episode Details

Almost everyone is predicting that property prices will surge higher this year. In fact, the newspapers are already full of stories about properties selling well above reserves.

Low stock levels are partly responsible for the currently exuberant property market. That exuberance might cool as more stock becomes available. But the RBA and the government do not want prices to rise too quick as it might create a bubble, and all bubbles pop eventually.

Predictions of rising property prices

Westpac’s chief economist, Bill Evans predicts that Australian property prices will rise by 20% over the next two years. Most other economists agree with him.

Mr Evans cited Australia’s better-than-expected economic recovery, the vaccine rollout and historically low interest rates as the reasons for his optimistic property price prediction.

According to ABS lending indicators, the property market is still dominated by owner-occupiers. However, as overall sentiment improves, it is likely that investors will return to the market and that could further fuel price rises. The government could become concerned if it believed growth rates were unsustainable.

Imminent loosening of lending rules

Last year the government announced that it would scrap the ‘responsible lending’ rules in order to speed up loan approval times and eliminate the ‘one-size-fits-all’ approach (i.e. give banks more discretion). The practical consequence of this proposal change is that lenders may no longer have to ascertain what you currently spend each month (including discretionary expenses). Instead, they could use a benchmarks. In effect, for many borrowers, it would increase their borrowing capacity.

The Senate Committee recently recommended to the government that these proposed changes become law. The Bill will now need to be debated and passed in the Senate and the House of Representatives before it becomes law. If the Bill is ultimately successful, this could further fuel property prices.

Why the RBA cannot increase interest rates

There are two main reasons why the RBA probably will not increase the Cash Rate.

Firstly, as highlighted by Governor Lowe in a speech in October 2020, the lowest 40% of income earners have been impacted by Covid the most. Whereas higher income earns have been largely unaffected. In fact, most recent data indicates the top 40% of income earners are earning more than pre-Covid. Therefore, an increase in interest rates will adversely impact lower income earners who can least afford it.

Secondly, an increase in interest rates would be very bad news for the federal (and state) budget deficit. The Australian federal government total borrowings are tipped to reach $1 trillion. A 1% p.a. interest in interest rates would cost the government an additional $10 billion. Politically, this is not an attractive prospect. As such, the government has an incentive to maintain low interest rates.

How to cool an overheated property market

If the RBA doesn’t feel it’s appropriate to cool the prope