What do low interest rates really mean for the WA housing market?

With the latest RBA announcement setting a record breaking 13 month period of unchanged rates -the Australian economy is likely to experience interest rates at 2.5% until at least mid-2015. This is good news if you are thinking about buying a property…Right? The answer to that question is more complicated than just ‘yes or no’ as we investigate the real impact of low interest rates on the housing market.

In Reserve Bank Governor Glenn Stevens report following the latest interest rate decision, he expected lower than trend economic growth and continuing rising unemployment as key factors in the decision to hold rates at 2.5%. However, he has also outlined concerns in relation to the potential for a housing ‘bubble’ owing to more and more people entering the property market due to low rates.

Looking at national statistics, the housing market is in a boom period with prices reflecting the strongest winter month’s results since 2007.

This is concerning for a number of economic commentators because many of these buyers may try to exit the market once rates start to rise again.

This causes an influx of stock on the market and pushes prices back down. Not good news for those who have a substantial mortgage on a property that is their major investment.

While a property bubble is concerning, particularly if we think it will burst, Perth may be more protected from the fall out than our eastern states counterparts. We have a clearly defined two speed market on our hands, with Sydney and Melbourne leading the way while Brisbane, Perth and other capital cities record much more moderate growth. According to RP Data, Perth experienced 1% growth in dwelling prices for the last quarter and 3.5% for the year. This is very modest compared to Melbourne’s growth where dwelling prices have risen 6.4% in just one quarter and 12.4% for the year while Sydney has experienced 5% growth for the quarter and 16.2% for the year (RP Data, 2014).

The primary concern for those predicting a burst in the housing bubble is the types of loans that are being approved as banks seek to attract more customers for their home loans. In a recent article in The Australian, it was stated that loans to property investors had increased 3.3% this quarter and were up 10.9% for the year to date. The major banks had also recorded an increase in interest only loans up 12.8% in the last 12 months. Demand for fixed rate loans has also increased with lenders cutting rates on their fixed rate loans in order to attract more business.

Risky lending criteria by the major banks could lead to pain for those that have over extended themselves down the track when interest rates rise again.

One particular group concerned about the banks current lending practices is APRA. They have warned against banks riskier lending and while the RBA Governor is not a keen advocate of macro-prudential tools, there is talk that these types of limits on riskier or speculative housing lending may be required in order to avoid a major crisis.

The fact that housing is driving economic growth at the moment is also concerning for the broader economy as we see one sector dominating rather than spreading the ‘love’ between a range of market sectors in order to promote overall economic health. Banks are keen to lend to those investing in housing rather than small business due to the perceived lower risk. The reliance on the housing market to lift the broader economy is dangerous given the volatile nature of the property market in general.

Despite these fears, the positive aspect of low rates on the property industry can’t be ignored. The construction industry will benefit enormously. We have seen a distinct rise across the country in construction activity and in Perth in particular there have been significant increases in dwelling approvals with a 27% increase for the year.

According to the Property Council of Australia, not only does a strong housing market support increased GDP, it benefits employment in the construction industry and increases tax revenue to the state government via land tax, stamp duty and other property related taxes. In WA in 2014 that amounts to around $3.1billion to the state government coffers care of the property industry.

It is also important to point out that increased construction activity is a move toward meeting long term demand for housing as the population increases. This is good news for affordability in the long term, particularly in WA where keeping up housing stock to meet demand has been a constant battle, particularly since the 2007 property market boom.

Overall lower interest rates can be considered a possible danger for the housing market in relation to the virtual bubble bursting. On the other hand we have the increased level of construction activity and the general accessibility to the market that low rates provide. The lesson in this for those looking at buying is to think carefully, know your limits and if a bank loan deal seems too good to be true, maybe it is! Think about the long term and make sure you will be able to make payments on your loan even if rates go up… and factor in the reality that the market is cyclical and there will be peaks and troughs. The question is can you ride those waves through the long term?