Powered by MOMENTUM MEDIA
realestatebusiness logo

Breaking news and updates daily. Subscribe to our Newsletter!

Home of the REB Top 100 Agents
Breaking news and updates daily. Subscribe to our newsletter

Website Notifications

Get notifications in real-time for staying up to date with content that matters to you.

RBA reveals the downside of rising house prices

By James Mitchell
17 August 2015 | 1 minute read
city scape

The Reserve Bank of Australia has warned that rising property prices are creating risks in the economy and are unlikely to improve the wealth of the nation.

In an address to the 54th Shann Memorial Lecture, deputy governor Philip Lowe outlined the significant implications of rising property prices on Australian households.

“Ever-rising housing prices, relative to our incomes, do increase risks in the economy and are unlikely to make us better off as a nation,” Mr Lowe said.

Advertisement
Advertisement

Mr Lowe said that rising property prices have significant implications on future generations of Australians, who could struggle to afford their own homes.

This in turn has negative ramifications for Australian parents who are increasingly using capital gains to help their children purchase property, he added.

“For an older person who owns their own home and has no children, the capital gain from the higher land prices more than offsets the expected higher future housing costs,” Mr Lowe explained. “Such a household is better off.”

The same is true for owners of investment properties, since they own multiple dwellings on which they earn a capital gain, Mr Lowe said.

However, for young homeowners with multiple children, it is possible that the higher future expected housing costs could exceed the capital gain on their dwelling, he said.

“Many parents around the country look at the high housing prices and worry their children will not be able to afford the type of property they themselves have been able to live in, even if their children were to have the same lifetime income profile as they have had,” he said.

“In effect, these parents are doing the present discounted value calculation and they see the potential problem.”

Trends in the intergenerational transfer of wealth are gradually changing. The RBA is now seeing more first-home buyers receiving loans from family and friends.

The RBA has also seen evidence of younger generations receiving increased assistance with household expenses from older generations, including by continuing to live in the family home.

“It is quite likely that these trends will continue with it becoming more commonplace for parents to help their children in the property market,” Mr Lowe said. “This has both economic and social consequences.”

The result means that fewer parents will be able to use the capital gains that they have benefited from to boost their own consumption, Mr Lowe said.

“Instead, they will be using those capital gains to support the following generations with their higher housing costs,” he said.

“Alternatively, if it turns out that today's generation use their capital gains to increase their own spending, then they will have less ability to help their children.”

If this were to happen, Mr Lowe said he suspects that, over time, there would be some downward pressure on property prices relative to incomes, as future generations deal with the high cost of housing.

[Related: Reserve Bank warns of more boom and more debt]

RBA reveals the downside of rising house prices
victorian
lawyersweekly logo

Tags:

Listen to other installment of the Real Estate Business Podcast

 

Do you have an industry update?

top suburbs

12 month growth
Queenton
69.76%
Flying Fish Point
69.61%
Point Piper
69.17%
Glenelg South
69.02%
Pretty Beach
69.01%
Bar Beach
68.9%
Northampton
68.7%
Kembla Grange
66.91%
Boomerang Beach
66.67%
Gnarabup
66.67%
SEE AREA REPORTS ON SMART PROPERTY INVESTMENT WEBSITE
Subscribe to Newsletter

Ensure you never miss an issue of the Real Estate Business Bulletin.
Enter your email to receive the latest real estate advice and tools to help you sell.