Australia’s booming property market could push up interest rates

Australia’s property market is officially booming, with prices now rising at the fastest rate in 17 years. But it could cause some big problems.

Australia’s property market is officially booming, with prices now rising at the fastest rate in 17 years.

But while it’s great news for those looking to sell up and line their pockets, there are concerns the market could be on its way to overheating.

And as a result, the Reserve Bank of Australia could potentially be forced to hike up the official cash rate from the current historic low of 0.1 per cent.

While that’s unlikely to happen at this afternoon’s meeting, more and more experts are predicting a rate rise could now be on the horizon far earlier than predicted.

HOUSE MARKET BOOM

According to the latest CoreLogic data, values surged 2.1 per cent higher in February, the largest month-on-month change since 2003.

While some may find that strong result surprising given the current coronavirus pandemic and subsequent economic battering Australia and the world has faced, experts say the house price jump has been caused by a mix of obvious factors.

They include record low mortgage rates, improving economic conditions, government incentives and low supply levels.

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Potential buyers have been flocking to auctions as Australia’s property market explodes. Picture: Annette Dew

Sydney and Melbourne were among the strongest performing markets, recording a 2.5 per cent and 2.1 per cent lift in home values over the month respectively.

Some of Australia’s smaller cities were the big winners, with Darwin housing values rising 5.5 per cent over the past three months, Hobart values climbing 4.8 per cent and Perth up 4.2 per cent – and while the trend was seen in every capital city, it was also apparent across state regions.

CoreLogic’s research director Tim Lawless said Australia hadn’t seen a period of growth across all capitals and regions since 2009.

He said that while Sydney and Melbourne were on track to beat their previous 2017 record highs within weeks, those markets could soon become unaffordable enough to turn buyers off, which would wind down the intense acceleration.

At the moment, Sydney’s median property value, including both units and houses, is now a staggering $895,933, with Melbourne hot on its heels at $717,767, followed by Canberra at $706,454.

INTEREST RATE HIKE

While the RBA has previously indicated the official cash rate would likely remain at the current rate until 2024, a growing umber of economists are convinced a hike could come sooner than expected.

AMP Capital chief economist Shane Oliver told news.com.au while he expected the RBA would hold off on a rate rise for the time being, if the broader economy continued to recover quickly, it could bring forward a hike.

“We’re now thinking (a rise could happen) in 2023, or in two years’ time, but it may rise a bit earlier if things continue to hot up – it could come next year,” he said.

However, Dr Oliver said he believed the RBA would tighten lending practices first before a rate rise was announced.

He said that option would be more attractive to the RBA if the property market remained strong as government home buying incentives such as the First Home Loan Deposit Scheme and HomeBuilder were wound down, with New Zealand already going down that route.

“First home buyers will top out but investors are picking up and in turn that could bring on a tightening of lending standards this year or next year,” he said.

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The trend was seen in every capital city and in state regions.

“The RBA could discuss with the Australian Prudential Regulation Authority through the Council of Financial Regulators and tap the brakes in terms of lending to slow down the pace, which is probably what they would do initially.”

Dr Oliver said experts would never have expected such a strong performance a year ago, when Australia was in the early stages of the coronavirus pandemic and recession and when experts were predicting significant house prices falls.

But he said Australia had been cushioned from the blow due to the success of various government schemes such as JobKeeper, which protected people’s incomes and stopped a widespread default on loans.

“In the meantime, there is a lot of pent-up demand for property, record low interest rates, various incentives driving the boom in demand from first home buyers and people wanting to relocate form the cities to suburbs and regional centres,” he said.

“That is creating a lot of activity, and there’s also a lack of supply with market listings pretty low, and also an element of FOMO creeping in.

“All those factors are driving it … and we have seen nowhere near the negative economic impact we expected.”

Originally published as Australia’s booming property market could push up interest rates