As interest rates in Australia continue to hover around near-historic lows, investors from both home and abroad are snapping up more home loans than ever. According to the Australia Bureau of Statistics, nearly half of all home loans in the country in July – an incredible 49.7 percent – were acquired by investors. Indeed, the value of investor loans during that month was up by 6.8 percent, and there’s no sign that they will slow down any time soon. This activity could have some interesting – and potentially unpleasant – consequences for the housing market in the future.
Glenn Stevens, the governor of the Reserve Bank, recently expressed concerns about the ever-increasing number of mortgages that are being taken out by investors. As he noted in a statement, this activity could prompt a destructive boom-bust cycle that could cause serious, long-term damage to the housing market and even the economy as a whole. Low interest rates are luring investors from around the world. At the same time, there’s a limited supply of new and existing homes for sale. Not surprisingly, this is causing home prices to skyrocket. When interest rates go up, which they inevitably will, investors holding variable-rate loans may be spurred to sell. This could cause a glut of homes to appear on the market, which will send prices plunging.
Bad News for First Home Buyers
As worrisome as the idea of a never-ending boom-bust cycle may be, it hasn’t come to fruition just yet. With the right planning, it may even be avoided. That’s of little comfort to first home buyers in the country, however, who are increasingly being squeezed out of the market by the frenzy of investor activity. Indeed, buying a home in Australia is expensive in the first place. With prices going through the roof in most areas, it’s all the more difficult for younger Aussies to become homeowners.
According to the most recent AFG Mortgage Index, first home buyers accounted for only 9.5 percent of all broker-originated home loans in August, which is the lowest rate in four years. Fewer and fewer first home buyers are able to secure mortgages – the number dropped from 13.2 percent in June to 12.2 percent in July – and all of the home loans being secured by investors are largely to blame. There are no easy solutions to this problem, but there’s little doubt that the government will have to offer incentives or take other steps to make housing more affordable for younger Australians.