by Myer Lipschitz
22. July 2009 22:47
Is a second housing bubble being created in Australia (but particularly in Melbourne) by artificial manipulation of the housing market by the Federal Government?
Australian consumer sentiment increased for the second consecutive month in July to reach its highest level in 19 months as households grew more optimistic about an economic recovery. This surge in optimism comes despite the fact that the Australian Treasury says that Australian households have lost a total of 602 million Australian dollars in the five months since the economic crisis took effect. This amounts to a loss of approximately 33,500 Australian dollars in household wealth since December 2007.
Home loans showed an increase for the eighth straight month as record low interest rates and generous government grants to first time homebuyers took effect. Improvements in consumer confidence (an increase of 23.2% in the last two months) and the buoyant property market seem to reinforce the Reserve Bank of Australia's (RBA) view that the Australian economy will recover later this year.
The RBA's official cash rate remained at a record low of 3% having fallen 4.5 % since September of last year. It will be interesting to see whether the RBA retains the status quo in its next review of the official cash rate but as economic activity increases on the back of increased consumer confidence it is inevitable that interest rates must rise to quell inflationary pressure.
Given my comments in the preceding paragraph you would be forgiven for not wishing to be in too much of a hurry to purchase property in Melbourne. However shortages of rental accommodation are increasing rental prices and as one has to live somewhere, many are deciding to bite the bullet and purchase overpriced housing by locking in low fixed term mortgages. Vacancy rates for rental accommodation in Melbourne are between 1.0%.- 3.9%
With the decrease in household wealth mentioned above its difficult not to speculate that Australia is heading for another housing bubble unless real income increases proportionately to compensate for the increase in the cost of housing.
Let's hope that the confidence in consumer sentiment translates to greater economic activity otherwise the government’s action in staving off a recession by artificially manipulating market forces in the housing market may come at a cost yet to be felt.
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