While many believe that Australia’s low interest-rate environment will help homebuyers break into the market as mortgage becomes cheaper and accessible, some, including the Reserve Bank of Australia, think it would eventually price out prospective property buyers.
The central bank said the cash rate, which is now at a record-low of 1%, is a crucial driver of housing demand. The RBA indicated that low interest rates were one of the reasons behind Australia’s massive debt-to-income ratio at 190%, which is the second-highest in the world.
“Over a long period, the structural decline in nominal interest rates stemming from lower inflation and financial deregulation have enabled both higher housing prices and higher household debt relative to income,” the RBA said in a written response to the questions from the House of Representatives Standing Committee on Economics.
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The RBA also said that as Australia welcomes more people, the demand for homes will likely surge, resulting in a substantial jump in housing prices.
“In particular, Australia’s strong population growth has been an important driver of both housing prices and rents in recent years,” it said.
There was a population increase of 848,570 in the year to May, representing a 5.7% annual jump. When departures are taken into consideration, the net annual immigration rate stood at 294,430. This is four times the average of 70,000.
Early this year, a study conducted by RBA analysts found that interest-rate changes play a more significant role in house-price movements, particularly in the increase recorded during the property boom.
The central bank started the downward trend in cash rate in 2011, when it lowered the official rate from 4.75%. From August 2016, the cash rate was left unchanged at 1.50%. The RBA decided to slash rates to another historic low of 1.25% in June, before cutting it again the following month to 1%.
The study found out that a one-percentage-point cut in the cash rate has boosted house prices by 8% over the past two years.
“The model suggests that much of the strength in housing prices and construction over the past few years can be explained by the fall in interest rates. It is changes in interest rates and in existing housing prices that drive construction, not their level,” the study said.