The RBA has urged homebuyers to be “realistic” about their property investments, with low interest rates and self-managed superannuation funds quickly driving up house prices in the past year.
In its Financial Stability Review today, the Reserve Bank noted that low interest rates had encouraged Australians to take on riskier investments like real estate and equities since about 2011-12, instead of paying down debt.
Here’s what it said:
Over the past year or so there has been an increase in property market activity … The increase in investor activity has been associated with a recent pick-up in Sydney housing price growth and reports of sale prices exceeding price guidance and valuations by wide margins.
An increase in housing market activity more generally is not surprising given reductions in interest rates.
However, it is important that those purchasing property maintain realistic expectations of future dwelling price growth; in contrast to the decades leading up to the crisis – when dwelling prices grew rapidly in response to disinflation and financial deregulation – long-run future growth in dwelling prices might be expected to be more in line with income growth.
The RBA said the increasing popularity of self-managed superannuation funds (SMSF) could also exacerbate high property prices.
SMSFs hold about 15% of their assets in direct property holdings, of which 77% tends to be commercial property and 23% is residential.
SMSFs had a total of $500 billion in assets in June this year, and could also be exposed to indirect property holdings through trusts and managed funds, the RBA said.
“The share of property assets held by SMSFs has increased over the past six years, partly driven by changes to superannuation legislation that have made direct property investment both more appealing and more accessible to SMSFs,” it reported.
“One risk of the increase in property investment by SMSFs is that at least some of it is a new source of demand that could potentially exacerbate property price cycles.
“For the financial system, the direct near-term risks arising from lending to SMSFs are likely to be small … In any case, the rapid growth of the sector warrants ongoing monitoring, and it is important that banks maintain sound lending standards and practices.”
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