The Reserve Bank’s October decision to maintain interest rates at a low 2.5% has engendered varied responses from property analysts and commentators.
While some agree with the RBA’s assessment of “accommodative” monetary policy, others worry that the ongoing low interest rate environment is causing escalating pressure in Australia’s housing sector, led predominantly by enthusiastic investors.
In a statement released after its monthly meeting the Board acknowledged that, “Interest rates are very low and have continued to edge lower over recent months as competition to lend has increased.”
The RBA said, “Investors continue to look for higher returns in response to low rates on safe instruments,” adding, “Credit growth is moderate overall, but with a further pick-up in recent months in lending to investors in housing assets.”
The Board is well aware that a more competitive lending arena is enticing increased purchaser activity across capital city property markets, and readily concedes that dwelling prices have grown steadily over the past few months.
However, it cites the probability of long-term interest rates and risk spreads remaining very low, as well as little chance of an increase in global interest rates “or other adverse events” in coming months, as sufficient reason to continue down the current cash rate road.
Too much too soon?
In this competitive lending arena, property investors are vying for reliable bricks and mortar assets, tempted by the promise of lucrative returns that easily outstrip monthly interest repayments and leave them in a relatively comfy cashflow position.
But economists are worried that when this current status quo changes, we could end up with a glut of residential housing stock on the market as the capacity for people to hold their investments over the long term is compromised.
This could, in turn, send Australia’s property values into a downward spiral and create further flow-on ramifications for the local economy and banking sector.
Competition heats up
With the Reserve Bank sitting on its hands each month in response to a consistently lacklustre overall rate of inflation, analysts are questioning how the current frenzied market activity will be curbed, so as to avoid the possibility of a property bubble.
Some have suggested the Central Bank and APRA will be forced to put a leash on lenders, who are competing fiercely to secure their share of the current borrowing bevy with low rate and other enticing product offerings.
Six lenders are now tendering cash-back deals of up to $1000 on selected mortgage products, including the NAB and CBA, while eleven lenders (St George being one) are waiving establishment fees for new home loan customers.
That’s on top of the ever-reducing rates on offer for both fixed and variable home loan products, with some dropping by as much as 70 basis points and 30 basis points respectively over the past month.
Are lenders doing enough to mitigate risk?
Talk of macroprudential policy to decrease the prospect of high-risk loans being handed out like the proverbial lollipop has surfaced in recent times, with the RBA said to be keeping a watchful eye on the incidence of higher loan to value ratios being approved.
However lenders seem to be responding to the potential pitfalls of this low interest rate environment with their own actions, as the supply of high-risk loans has been markedly curbed over the past twelve months.
According to RateCity, although the banks might be keenly baying for new business, the number of low-deposit home loans (those requiring a deposit of 5% or less) has decreased to 69% of market share, down from 73% in 2013.
Whether this is enough to stem concerns that continue to float around the property market ether is anyone’s guess. But one thing is certain, it’s unlikely that in such a favourable lending environment, investors are going to pack up their bat and ball and head home anytime soon. It will certainly be interesting to see how the RBA responds to various macroeconomic indicators as we head into 2015.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).