Australia’s record low interest rate environment has been a challenge for financial regulators trying to cool asset bubbles such as residential housing. Fear of buyers taking on too much cheap debt when interest rates are at record lows is thought to be keeping some regulator’s awake at night, as household debt to household disposable income metrics balloon to record levels.
Australian Securities and Investments Commission (ASIC) chairman Greg Medcraft has told a Senate estimates committee, borrowers need to do their sums on a mortgage rate of 7 percent, not 4 percent as interest rates won’t stay low forever.
The banking watchdog, the Australian Prudential Regulation Authority (APRA), has been instructing banks to perform loan serviceability stress tests at an interest rate floor of 7 per cent, a buffer for when rates eventually rise. Banks such as ING Direct have been stress testing their borrowers’ at an 8 per cent interest rate floor.
So you can imagine the surprise today when Reserve Bank of Australia senior research manager Peter Tulip delivered preliminary results of his research showing Australian house prices are undervalued by 30 percent, simply because interest rates have plunged in recent times as the economy slows and jobs are lost. Dr Tulip makes this assessment on the assumption house prices were “fairly valued” last year.
As Sydney and Melbourne house prices rocketed in the last twelve months, notching up double digit gains multiple times that of inflation, interest rates have fallen from 2.5 per cent to just 2 per cent, a twenty percent fall.
Tulip said, “We find that owning a house costs 30 per cent less than renting,” with little consideration on what happens when interest rates rise from the depths of a 60 year record low during the 20-25 year term of a mortgage.
» House prices 30% undervalued. Buy, don’t rent, says Reserve Bank official – The Sydney Morning Herald, 8th July 2015.