Found this article and have cut and pasted it,three references are stated below
cheers,
House prices are soaring
May 2014
Australia’s housing market is sizzling. The prices of Sydney homes soared 13.8% last year and have not stopped rising since. Melbourne prices jumped 7.9% in 2013 and this year look just as buoyant. People seem to have forgotten all the damage housing bubbles have caused all over the world in the past decade.
Low interest rates and the easy-to-believe idea that home prices will only go up are fanning the price increases that amounted to 9.3% across Australia’s eight capital cities on a weighted average basis last year.
Low mortgage rates helped drive home affordability to a more-than-decade high in 2013, as measured by the Housing Affordability Index compiled by the Housing Industry Association and the Commonwealth Bank of Australia.
[1]
This index rose in recent years because the monthly mortgage repayment on the median dwelling price fell from $2,972 a month in the December quarter of 2011 to a low of $2,458 in the September quarter of 2013
(17%) decline. Mortgage payments dropped over that time because the Reserve Bank of Australia cut the
cash rate from a post-crisis peak of 4.75% from November 2010 to November 2011 to a record low of 2.5% in August 2013.
The cash rate has stayed there ever since and many analysts expect the Reserve Bank to hold it at this level for the rest of the year, at least, because inflation is tame, the economy is lacklustre and policymakers don’t want higher rates to drive up the
Australian dollar.
But all too soon low interest rates will act against housing affordability and a vicious cycle may commence. Once the belief sets in that residential prices can only rise, buyers acting either on the hope of capital gain or thinking they need to purchase before prices surge again use lower interest to justify borrowing, and then paying, more for housing. Amid a flurry of buying and no imminent rise in supply, the HIA-Commonwealth Bank Housing Affordability Index duly slipped 0.5% in the December quarter as the median house price rose to $470,400 from $459,000 three months earlier.
[2]
A nasty cycle can kick in if policymakers
start worrying that housing is becoming overheated. Already the Reserve Bank of Australia is warning that "it is important for investors and owner-occupiers to understand that a cyclical upswing in housing prices when interest rates are low cannot continue indefinitely.”
[3]
If such counsel is ignored and prices gain more in coming months, the RBA might need to raise the cash rate to cool the housing market, even if higher rates will damage the economy and bolster the dollar. If rates go higher, investment-driven demand for housing could well plunge given that rental
income as a percentage of price paid for a dwelling is low.
One trend that would worry policymakers (and should worry investors) is that the ratio of average house prices to average earnings is widening towards the record high of 4.5 reached in 2010, compared with just above 3 in 2000. While this is a problematic measure because it ignores interest rates on a good (housing) that is purchased for consumption and
investment reasons and is blessed with tax concessions, it’s clear that property prices can’t endlessly outstrip wage gains. Average weekly earnings only jumped 3.2% last year, about a third of the national gain in housing prices.
The question becomes one of how wages and house prices can become more in synch with each other. If you can’t see wages soaring – and why would they if the jobless rate is expected to rise – that means property prices must idle for a long time or decline. And if you think property prices in Australian capital cities can’t fall, you’re wrong.
While Adelaide, Brisbane, Darwin, Hobart, Melbourne, Perth and Sydney prices rose last year, they fell 0.3% in Canberra on concerns that the new government will prune the public service and be meaner with pay rises.
Information on Australian residential property prices come from the Australian Bureau of Statistics report 6416.0 – Residential property price indexes: eight capital cities, Dec 2013. Issued 11 February 2014.
http://www.abs.gov.au/ausstats/[email protected]/mf/6416.0
Financial information comes from Bloomberg unless stated otherwise.
Important information
References to specific securities should not be taken as recommendations.
[1] The Housing Affordability Index tracks the average household disposable income to qualifying income needed to foot mortgage payments on the median-price dwelling. Its definition of affordability is housing costs should never exceed 30% of a household’s income.
[2] HIA-Commonwealth Bank Affordability Report. “A quarterly update on the affordability of housing.” December quarter 2013. Released 27 March 2014.
http://hia.com.au/~/media/HIA Website/Files/IndustryBusiness/Economic/publications/Affordability_Report_13_extract.ashx
[3] Reserve Bank of Australia. Financial Stability Review. March 2014. Page 2.
http://www.rba.gov.au/publications/fsr/2014/mar/pdf/overview.pdf
