Get set for Tulip mania: House prices 30 per cent undervalued!

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.




26 Comments

  1. Now its getting comical but no one is laughing because they can see the inevitable destructive property crash is on its way with no way of stopping it. These comments from an overpaid senior bureaucrat Mr Tulip reminds me of Baghdad Bob during the Iraqi War. (For those of you who are too young he was the Iraqi spokesperson denying that his country was being blown apart around him as he spoke)
    No doubt there will soon be a wonderful job opening for him at the Real Estate Institute.

    https://www.youtube.com/watch?v=yfAeMtcURg0

  2. This is oh so very excellent! I hope a few greater fools listen, lever up, and pile in. The bigger this gets, the louder the pop!

  3. LOL. Jut woke up to Channel 9 Today show with experts on the TV saying Sydney is “massively” under valued, and surging rents (less than inflation in many places) is a major setback for poor old renters, suggesting they all need to enter the market.

    Peter Tulip says the research is his and should not be attributed to the Reserve Bank. Do you think it is RBA sanctioned jawboning?

    My guess is the Sydney property market is collapsing faster than they expected after reports from Treasury saying Sydney was “unequivocally” in a bubble.

    The banks are all cutting back on Investor lending, so they now urgently need to balance the market with FHB, otherwise prices will fall and banks such as Westpac and the Commonwealth are likely to collapse?

    I think it sounds like a very dangerous time in history to enter the market.

  4. With idiotic comments coming out of an institution like the RBA, its no wonder this country is a standing joke to all but the fools and suckers who buy the spin.

    He needs to change his surname to Turnip, it would suit him to a tee.

  5. What next! Perhaps a speech by the senior sanitary analyst for the RBA, Mr Southsea (bubble) as to the lower cost of toilet paper relative to the greatly increased use of facilities after the announcement by the IMF that Australia has the biggest real estate bubble in the Western World.

  6. For someone who holds a “Doctor” title.. he is either really simple or biased.

    He is saying its 30% undervalued because he is using the “boom” rates for house growth and factoring in that TODAY the mortgage rates are LOWEST ever at 2%… so he is using a HIGH variable from a trend-up environment… then building a case with it by using a LOW variable from a trend-down environment….

    Just pathetic…. from someone who studied that long to get that Doctor title… just too simplistic.

    Using “undervalue” as a word to describe housing today is a HUGE lie to young people paying 6-7 times their income for housing…. rent is rent… if you want to RENT in a nice suburb instead of using the same amount of RENT money to buy a house in a less-nice suburb, then thats a lifestyle change.

  7. Oh my word, what a tool. He has done previous research on house prices before. google his name.
    He reasons that it is expected that house prices increase faster than incomes because of a shortage of land!
    Also that although the house price to rent ratio is useful for forecasting prices in the USA we have not found that in Australia. In other words “we are different”

    I can not believe in anything this guy writes. it is ill-informed property propaganda.

    I would choose to believe the IMF or BIS over this Muppet.

  8. @2. LordDudley,

    Mi Lord-D, this loud pop will also result as a quick collapse, not a so called slow melt.

  9. people think reality television is reality and they think bullshit is fact. Welcome to the new normal people, very embarrassing. Personally I feel disconnected from people I know which includes family and friends, it’s sad but I realise it’s more common place. It’s easier to refrain from these topics with family and friends because we are outnumbered by the greater fools. This is really a sad sad time to be Australian and on many different levels.

  10. Went through the research paper….Tulip removes the long term rate of inflation from the mortgage rate to come up with a cost of debt?!

  11. @12 – agreed. I just got back to Aus from the UK and kinda wanna go back… housing is cheaper in London. We should all be ashamed of the ‘investors’ of this country who are running away with affordability.

  12. @AB

    I read Dr Tulip’s OECD report on Iceland written just before its banking system collapsed and CEOs jailed Quote “From a financial vantage point, Iceland’s growth prospects are bright” As a senior analyst and advisor to the RBA we should heed his optimistic assessment of the housing market as a sign that the collapse is near.

  13. @ S (15)
    To be honest I didn’t read the whole article because the first paragraph was enough. Old McDonald had a farm and on that farm he had some sheep. Eee I eeee I ooooh

  14. “Confidence was quickly restored, all being convinced that the Titanic could not founder. Captain Smith nevertheless appeared nervous; he came down on deck chewing a toothpick. ‘Let everyone,’ he said, ‘put on a lifebelt, it is more prudent.’ Soon after midnight, Captain Smith gave the order to prepare the boats, but still no general alarm was raised.”

  15. WHAT A DUMB F#$KING IDIOT!!!!!!!!!!!!!!……… Yeah if anyone believes then you should go buy some investment properties before you miss the chance……LMAO

  16. “AB Says:
    July 9th, 2015 at 1:24 pm
    Read what Dr Tulip had to say about Iceland in 2007.
    https://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?doclanguage=en&cote=eco/wkp(2007)9
    “This growth of Iceland’s financial sector is interesting in its own right. But it is also highly
    encouraging for Iceland’s future economic prospects.”

    Hahahaha hahahahaha hahahahahaha hahahahaha

    Yeah the people at the Reserve Bank know what they are doing, they are our ‘best and brightest’, yeah … hahahahahaha hahahahahaha hahahaha

  17. @ 12.

    The reason we have RE bubbles, stock market runs, etc is because the majority of people are indeed greater fools. If everyone put more effort into researching managing the important things in life, ie health, finances, and politics, then the world would be a much calmer saner place. Meanwhile, back in Sydney…..

  18. @15.

    Try talking to a Mum & Dad investor, or taxi driver about investment properties, they just can crunch the numbers or see what a poor investment property is right now. All they see is marketing bulls1t, and shows like The Block, and they buy into the spin of ever increasing house prices.

    “Those that fail to learn from history, are doomed to repeat it.” – Winston Churchill

    “That men do not learn very much from the lessons of history is the most important of all the lessons of history.” – Aldous Huxley

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