Since the global financial crisis fixed interest yields for investors have remained at record lows. In the current climate it would be difficult to find an unsecured bank deposit which pays more than about 3 per cent. For this reason investors are searching for higher yields – and they looking for it in both residential and commercial real estate.
In spite of weak household income growth, demand by speculative investors is pushing up prices. In its March Financial Stability Review the Reserve Bank cautioned that when rates rise again the risk is that property prices will fall sharply, resulting in an economic shock because of a fall in household spending and wealth and subsequent bank loan losses. Australian borrowers are sensitive to monetary policy movements as the majority have their loan costs determined by the overnight cash rate. This is in stark contrast to Britain and the United States where fixed-rate mortgages are more popular. In order to boost economic activity the Reserve Bank may cut rates again in April or May.
Importantly, though, for investors and borrowers there are some stabilizing factors – population growth and immigration both mean that demand for property, especially dwellings, will continue to be a major factor offsetting the 2014 unusually strong rise in house prices and lending. In 2015 capital is being poured into construction which will boost the economy and provide supply for this underlying demand. To this end, investors are targeting building supplies companies listed on the stock exchange, such as CSR, James Hardie and Boral. Also Harvey Norman, where consumers go to furnish their new homes, will reap the investment benefit.
Another strong advantage of the house price growth is is that prices have increased so much in recent times that they have outstripped credit growth, so the housing debt to assets ratio has declined. This means default rates are relatively low, but also the value of the collateral protecting bank balance sheets has improved.