RBA: House prices could rise 30% in next three years

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on January 18, 2021
RBA: House prices could rise 30% in next three years

Internal central bank documents have revealed the potential effect of continued low interest rates on house prices.

Confidential Reserve Bank (RBA) analysis obtained by a Freedom of Information (FOI) request found house prices could rise by 30% over the next three years. 

The meteoric price rises would be driven confidence in borrowers that the cash rate would remain at its record low 0.1% level over that time. 

RBA Governor Phillip Lowe has stated the cash rate would remain at that level for at least the next three years, as economic recovery from COVID would be uneven and protracted. 

Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Lender

Variable
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UNLIMITED REDRAWSSPECIAL OFFER
  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
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Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
Variable
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100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES
  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
Variable
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NSW/VIC/SA METRO & INNER REGIONAL AREAS
NSW/VIC/SA METRO & INNER REGIONAL AREAS

Variable Home Loan (Principal and Interest)

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Variable
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REFINANCE ONLY
  • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
REFINANCE ONLY

Variable Rate Home Loan – Refinance Only

  • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
Variable
More details
NO ONGOING FEESFREE REDRAW FACILITY
  • Rate Match Guarantee. Tic:Toc will match the rate on identical variable P&I home loans. T&C's Apply.
NO ONGOING FEESFREE REDRAW FACILITY

Live-in Variable Loan (Principal and Interest) (LVR < 90%)

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Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of June 29, 2022. View disclaimer.

Should the low interest rate be a temporary measure, and the rate was hiked by one percentage point, house prices would rise by 10% over the three years. 

The RBA noted the effect of the low cash rate was seen mostly in areas where investor activity and debt was high.

"Monetary policy appears to have larger effects in local areas in which housing supply constraints are binding, mortgage debt is higher and there are more housing investors," the report said. 

"Currently, much of the credit growth is coming from owner-occupiers." 

The RBA found high unemployment was the biggest risk to the economy and lower interest rates could help reduce this risk. 

It said as house prices increase, more borrowers would be buying near the price peak, which meant more of the loan book was likely to be in negative equity.

Australia's financial regulators would monitor the risks to the housing market, and the Council of Financial Regulators would step in if needed. 

"Since 2015, lending standards tightened substantially for both housing and commercial property," the RBA noted.

"APRA (Australian Prudential Regulation Authority) and ASIC (Australian Securities and Investments Commission) have both taken steps to reinforce sound lending for residential mortgages in particular." 

House prices have turned a corner recently, rising for three straight months, according to data from CoreLogic, and rose 3.0% in 2020. 

Older people hurt by low rates 

The RBA noted older generations were significantly worse off thanks to low interest rates compared to their younger counterparts. 

With savings account and term deposit rates at dismal levels, older households who rely on interest income will suffer. 

Households with someone aged 65 and over earned more than 20% of their income directly from interest, while for people aged 75-79, interest income was 10% of their gross regular income. 

"Households reliant on interest income are now required to draw down more of their savings than in the past to maintain the same cash flows," the RBA noted. 

However, self-funded retirees and those who owned property would be helped by rising asset prices, as housing accounts for around half of the wealth of households 65 years and older. 


Photo by Michael Amadeus on Unsplash

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

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Alex joined Savings.com.au as a finance journalist in 2019. He enjoys covering in-depth economical releases and breaking down how they might affect the everyday punter. He is passionate about providing Australians with the information and tools needed to make them financially stable for their futures.

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