As any regular followers of my blogs or newsletter would know, I am a big advocate of investing for long term capital growth as opposed to short term rental yields. So when I heard the Reserve Bank suggest that this type of investment activity could be the very reason we end up with a housing bubble, naturally I was slightly taken aback.
Are investors really the problem behind the future of Australian property, or is the central bank being a little bit dramatic?
A recent article in The Age, says that according to head of financial stability for the Reserve Bank Luci Ellis, lower rental yields will place a limit on the rate of house price appreciation.
“If rental yields are very low, investors are buying properties without really thinking about the rental yield,” Dr Ellis said.
“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. So that would be undesirable and be seen as a problem.”
However Dr Ellis admits that rental yields have risen of late, and says the recent stabilisation of house prices is a welcome change. While she says property prices don’t need to return to a 1970’s level of affordability, “…they can’t go onwards and upwards faster than income forever.”
The RBA’s big concern is that household debt is still too high, even though the debt to income ratio has levelled out of late.
Dr Ellis says, “Household debt in Australia has come up quite 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.”
“So it’s increasing the debt most amongst the people who’ve got the least risk and lowest gearing,” she said.
Apparently Dr Ellis is worried that investors who can afford to continue buying property will cause values to rise further, leaving those who are already struggling with increasing household debt in a serious dilemma.
But in comparison to some European nations, such as Denmark (where debt levels are at 300% of disposable income), Australia’s debt levels are fairly tame.
While I understand the RBA’s concerns, I believe that investors who purchase on the proviso of capital growth are actually doing the right thing. They are attempting to reduce their overall debt by increasing the profits generated by their portfolios. I also don’t think you can place the blame for any housing bubble that might occur in the future squarely on the shoulders of one buyer demographic.
In my view, property investors who buy for long term capital growth are possibly the most sensible purchasers in the market; they always look to buy below intrinsic value and unlike emotional home buyers, don’t partake in the type of bidding wars that are often the real cause of over-inflated price growth.
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