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Are Investors Creating a Housing Bubble?

People investing in real estate to lease out as rental properties with the intention of earning capital gains could be creating a bubble in the value of Australia’s property market.

The Reserve Bank head of financial stability, Lucy Ellis, addressed a recent CPA Australia conference in Brisbane on the matter. Dr. Ellis said current low rental yields when compared to mortgage repayments meant there has to be a limit to how much house prices can increase.

When queried about whether or not lower rental returns would lead to a limit on the growth of house prices, Dr. Ellis’s answer was to the point, “The short and simple answer is – yes.” she said.

Dr. Ellis continued, “If rental yields are very low, investors are buying properties without really thinking about the rental yield … Buying an asset just because you are expecting the price to rise in the future, well that is actually the academic definition of a bubble.”

Dr. Ellis said rental returns had increased recently, but this type of thinking amongst future landlords was both undesirable and “seen as a problem.” She also discussed the prevailing belief amongst Reserve Bank members that the recent stabilisation of property values was fortuitous, although a return to 1970’s levels should not be on the agenda.

“But they can’t go onwards and upwards faster than income forever,” said Dr. Ellis. “Despite the bank seeing a levelling out in the household debt to income ratio, that debt is still high.”

“Household debt in Australia has come up a lot and does seem quite high. A lot of that increase in debt more recently has been in older households. So instead of paying off their mortgage by 45, they’ve still got one at 55. It’s increasing the debt most amongst the people who’ve got the least risk and lowest gearing.’’

However, if one looks at Australia when compared with the rest of the world’s per capita debt levels, we aren’t close to being the worst off. Various European nations like Denmark have debt levels of 300% when compared with disposable income, stated Dr. Ellis.

The high-ranking RBA official said it was a hard topic to fully understand or anticipate, as there is no concrete law about household debt to income level ratios. The issue has numerous variables including a person’s age, overall financial standing and multiple elements relating to their unique income.

Dr. Ellis finished the explanation by saying: “There isn’t anything in economic theory that would say that has to be a magic number forever, it’s actually an aggregation of many different decisions.”

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