Putting brake on housing bubbles

Recent economic indicators from Australian researches have projected a rather darker side of the Australia’s economic future, with possibility to some form of crash or recession in near future. Result from a new research show the household debt in Australia has grown to $1.8 trillion, equivalent to $88,000 per individual on average. This is 1.8 times than an average household disposal income compared to 1.1 times in the US and 1.5 times in the UK.

Low interest rates is reasoned to be the cause of growing competition to have investment properties. To discourage this uncontrolled growth, the central bank recently put pressure on banks to raise interest rate on investment lending. With this measure, the government and the central bank hope to cool down the housing boom. Sydney and Melbourne, two cities to have highest surge in the property prices, were likely target of the initiative.

Sydney’s prices are growing at 10.5% and Melbourne at 9%. In contrast, Perth and Darwin are going negative. Hammering one policy nationally is certain to further decline the housing market in Perth and Darwin. NAB report says, Sydney and Melbourne will continue their rise this year too.

Rise in interest rates for investment property is to encourage more to be the first home buyers. Over the last few years, large volume of Australian properties has concentrated on limited individuals – dividing societies and increasing rich-poor gap. The new aspirants failed to enter the market while already existing players continued tapping opportunities.

Though national figures show striking level of household debt, this is located within a small pocket of the national population. Their income-debt ratio is much higher than what is calculated for national average. The debt is so marginal that any adverse changes in the interest rates will collapse their empire.

The national reserve continued to hold on with the interest rates rise to avoid any such catastrophe. A significant rise in household debt had been the cause of many historical economic crisis including 2007-8 in US and 2011-12 in Europe. We felt the severity of the economic crisis of 2007-8 and it aftershocks continues even today. Small increase in the interest rates is certain to push large number of investors to brink, collapsing the housing market. On the other hand, cutting rates would further fuel the real estate prices as they jump to buy more properties.

The negative gearing was one of the many factors behind rising investment loans. Individuals who earn more can shed their income tax with investment losses on properties. The issue received tremendous coverage and attention during the last federal election and gradually subsided.

To avoid housing market collapse, put end to uncontrolled real estate prices and ensure everyone in Australia has his/her own house, it is time RBA take smaller steps to raise interest rates. The rise not only puts brakes on housing bubbles but also act as catalyst for inflation ultimately helping enhance economic activities. A strong discourage on negative gearing will also help provide equal share of property pie for every Australian.

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