How low is too low
Published in the Herald Sun, July 2014 by Karina Barrymore
Cheap interest rates may be driving up property and shares too quickly, writes Karina Barrymore
In theory, they help boost household spending by reducing the cost of borrowing.
But low interest rates could also be starting to do more harm than good.
There is growing unease that Australia’slow rates are pushing up property and share prices at a rate too fast to justify the benefit of cheaper debt.
And, as prices continue to rise, our assets are attracting increased buyer attention from overseas — further fuelling competition and more price rises.
Prescott Securities economist and managing director Darryl Gobbett says low rates are clearly luring Australian investors out of cash and term deposits and into shares and property.
“Low interest rates have pushed share prices up. They are one of the main driving forces behind share prices rising,’’Mr Gobbett says.
“As people now face no more than 3 or 4 per cent from having their money on deposit, they are looking to Australian shares, commercial property and residential property for better returns — and finding them.
“Our interest rates are also having an impact overseas. Big pension funds, big investors, now look at Australia as an obvious choice.
“While interest rates are historically low here, around the rest of the world they are even lower,some are zero, some are negative.’’
Mr Gobbett says this adds to Australia’s allure. Residential property is also feeling the price pressure from low interest rates, according to mortgage broker Resi Corporation.
“Low interest rates have certainly fuelled higher house prices, particularly in capital city markets such as Melbourne and Sydney,’’Resi spokeswoman Lisa Montgomery says.
“Confidence has increased and borrowers have been willing to commit to higher mortgage debt — especially upgraders and property investors.”
“Low interest rates have increased the borrowing capacity of first-time buyers, too, but (interest rates) have done nothing to solve the main issue they have, which is saving up a deposit.
“I don’t believe first-time buyers are priced out of the market, however I do think, for some, life priorities have shifted and purchasing an owner-occupier property will come later for them.”
Metropole Property managing director Michael Yardney notes finance approvals for first-home buyers are at a low level, but not due to interest rates or price rises.
“When you dig deeper, the numbers are down in NSW, Victoria and Queensland, where demand was pulled forward by state-based first homebuyer grants a few years ago,’’Mr Yardney says.
They are still at normal levels in the other states where there were no such incentives.
“Interestingly, property investors are putting their money into the same states where first-home buyers are catching their breath.
“Many of these investors are young and predominantly middle to high-income earners and are also first-home buyers — known as renting investors.
“They can’t afford to buy in the lifestyle suburbs that they want to live in, so instead they’re buying investment properties (elsewhere) to get on the property ladder.”
Fund manager Wealth Within analyst Dale Gillham says low interest rates “are an attractive reason to get into property, however, if you can’t afford the property, then it doesn’t matter what the interest rate is’’.
“If property has become too expensive for first home buyers, then they should invest in shares and use the growth and cash flow from dividends to assist them to purchase a property further down the track,” he says.
“But Australians also need to get away from the idea that they need to live in a house where their name is on the title.
“For most of my life I have not lived in a property where my personal name is on the title.Why?
Because it is financially smarter and gives me more flexibility to own property in good investment areas, which leaves me free to live in areas of my choosing.”
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