The RBA is seemingly tired of being everyone’s favourite whipping boy when it comes to blowing housing bubbles, recently suggesting that to blame low interest rates for the current investor led property craze, was to ignore the true fundamental pushing house prices up by double digits across parts of inner city Sydney in particular.
In shifting the focus from interest rates and fanatical investors, the central bank has arguably brought some semblance of balance back to the housing bubble debate.
Because while there are many mutable influences exerted on our residential real estate markets at various times and for various reasons – including interest rate fluctuations – one variable weighs in consistently to create the cyclical movements that drive our markets.
The Reserve Bank reminds us that the underlying value of any area, at any given time, is inherently underpinned by the supply/demand balance (or imbalance) of the day.
Governor Stevens and crew say rather than increased household borrowing activity driving prices skywards, a failure to supply sufficient new homes to accommodate a rapidly growing population is a much bigger factor at play.
It’s not about the money, money, money…
If low interest rates were a deserving scapegoat for rising property prices over the last two years, you’d expect household debt to be increasing significantly. But this isn’t actually the case according to the latest quarterly RBA bulletin.
“Looking ahead, it seems unlikely that there will be a return to the rather extreme conditions of the earlier episode when significant increases in household debt supported high housing price growth,” RBA researchers said.
The ‘earlier episode’ they refer to being the 15-year lead up to our previous mid-2000 property boom.
Rather, the central bank’s boffins point to a more worrying trend, in the form of a long run rise in population rates that potentially fails to trigger an adequate increase in housing supply.
The Reserve Bank claims we’re at risk of experiencing more concentrated cyclical fluctuations as the result of a continually worsening accommodation shortage.
The two RBA officials responsible for the report, Marion Kohler and Michelle van der Merwe, said high population growth and a lack of supply could lead to “periods of sizeable changes in housing price growth.”
The argument put forth by Kohler and van der Merwe is fairly watertight, who insist that even if lower mortgage rates were enticing more buyers into the property market sooner than they’d otherwise enter, the inevitable surge in new home construction should ultimately cool price growth.
“In the long run, even if mortgage rates were to remain low for an extended period of time, there should be a supply response to help move the market back into its longer-run equilibrium,” the pair contest.
“Indeed, the reduction in real mortgage rates since 2011 – following reductions in the cash rate – has been closely associated with both stronger house price growth and strong dwelling construction.”
In other words, the more attractive interest rate environment is not just fueling capital growth, but new dwelling construction activity too.
These findings are supported by recent evidence that suggests in areas where price gains have eased off, construction has surged and auction clearance rates are on the decline.
Less debt, more people
The RBA report looks at three decades of data to demonstrate three distinct price changes that have occurred since the 1980s, as follows:
- During the eighties – house price inflation broadly followed general price inflation, which was relatively high and quite volatile.
- Following financial deregulation – in the mid-1980s through to the early 1990s, households enjoyed cheaper and easier access to credit, encouraging higher borrowing ratios and spurring rapid property price inflation through to the mid-2000s.
- Over the past decade – debt to income levels have stabilised, however population growth driven by immigration and a demographic trend toward smaller household sizes has seen underlying accommodation demand exceed new home supply levels.
Essentially, the report’s authors suggest that the one factor critical to house price growth is the “ability of the supply of new dwellings to respond to changes in demand.”
This will no doubt be reinforced when, much as occurred in Melbourne’s last mini property boom, a saturation of high-density apartment stock set to flood some CBD locations will see prices cool somewhat, as supply levels regain their ground.
For property investors, this is just a timely reminder that even though different variables will exert pressure on property prices at different times, if you can identify a location that has enduring homebuyer appeal (demand), as well as land supply constraints, you just might have stumbled onto the pot of property gold at the end of the real estate rainbow.