Further interest rate cuts risk making property even less affordable in Australia’s two biggest cities, and according to experts would intensify dangerous imbalances already building in the economy.
There are fears that further interest rate cuts will have neither economic nor social good, if house prices surge from present levels.
Australia has been in a housing bubble, with unsustainable double-digit price growth in Sydney, and Melbourne following close behind.
“It might make people feel better, but since people are no longer willing to borrow against gains in the value of their properties in order to spend more widely, there is no economic benefit, there’s no wealth effect. There is also social harm done by locking an increasing proportion of younger generations out of home ownership and widening the wealth gap between those who own a property and those who don’t,” said Bank of America Merrill Lynch Australian economist, Saul Eslake.
One of the least considered effects of the capital city housing market boom is the potential it has to entrench wealth and to undermine social cohesion in the future.
ABC‘s business editor, Ian Verrender says, “Huge property prices lie at the heart of our economic ills. If there’s another interest rate cut it will only entrench an underclass.”
With interest rates at record lows and banks again accessing securitisation and wholesale debt markets to import cash, the frenzied buying shows no sign of abating.
While regional property markets generally have stagnated, capital city house prices rose almost 8 per cent last year alone, led by Sydney and Melbourne.
Sydney recorded gains of 12.4 per cent, which followed on from even stronger gains the previous year of 14.5 per cent that has left many aspiring homeowners permanently locked out of the market.
The buying has been dominated by investors – many gearing up superannuation funds or using negative gearing – sidelining younger Australians and those from outside the cities.
Despite the Reserve Bank‘s decision on Tuesday to keep interest rates on hold, it has done little to curb the doom. It is caught between fuelling on obvious housing market bubble and doing nothing to stop economic growth from stalling.
According to the Organisation for Economic Co-operation and Development, wealth inequality has been on the rise throughout the western world since the 1980s.
This is the dilemma facing the Reserve Bank.
Australian households, and by consequence our banks, are hugely vulnerable to a property market collapse, an event that would send shock-waves through the financial system.
But if we continue to artificially inflate real estate values, simply to protect the system, we risk creating a permanent underclass for future generations and price ourselves out of the global market.
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