It comes as no shock to hear that Australian properties are overvalued. The Reserve Bank has cut its interest rates with further cuts expected. This is as a result of numerous things including the Australian dollar remaining high, commodity prices falling lower than expected and the outlook for business investing falling. There is concern that further rate cuts will push house prices higher which may result in a collapse. Is this concern legitimate?
An economic uprising in Australia almost always involves housing. The lower interest rates drive housing demand and boost consumer home building. Plus more approvals are being given than ever before.
Are low rates just adding fuel to the already overheated property market? House prices are 14% above trend and the reason for this is highly debated. Low interest rates play a role but constrained supply is also a factor. There is a low vacancy rate and a short coming in supply of houses to the tune of 200,000 since 2001. Sydney is the main focus for property statistics, the rest of Australia is not as high.
Housing as an investment is a good idea and any serious investor will have housing under their belt as well as shares. Since 1920 housing has returned 11.1% per annum. This is not far behind shares returns, having both options is a positive move and also offers diversification.
In the short term we see low interest rates bringing gains in home prices, however this depends on location. The long term outlook is messy at best, housing is so expensive and has very low yields.
In the end there is no single reason that house prices are being pushed so high however it is clear the RBA is watching their actions carefully. One can only hope the prices become reasonable in time and must invest wisely.