Investors beware: house prices don't always rise

Investors beware: house prices don't always rise

Investing in bricks and mortar is a safe bet, right? According to the Reserve Bank of Australia (RBA), this is not always the case as the central bank warns home investment won’t always bring home the bacon. 

Recent comments from Glenn Stevens, RBA Governor, could make some Australians nervous by reminding them that house prices don’t always rise and aren’t a guaranteed safe investment.

However, careful financial planning, diversified investments and a high interest savings account may help cushion homeowners from potential pitfalls.

What’s the deal with house prices?

Addressing The Econometric Society Australasian Meeting and the Australian Conference of Economists in Hobart on July 3, Stevens had some sage comments.

“The rise in the value of loan approvals over the past year of around 20 percent is certainly significant,” said Stevens.

Thanks to a record-low cash rate (2.5 percent), a climate of affordable home loans has been evident across the country. Demand from home buyers, investors and foreign buyers and limited housing stocks in some areas has seen dramatic price rises.

However, homeowners should ensure their homes are not their sole financial safety net.

“The first is that in forming expectations about future price gains and deciding their financing structure, people should not assume that prices always rise. They don’t; sometimes they fall,” Stevens noted.

Will prices continue to rise?

“First, with dwelling prices having fallen between 2010 and 2012, some recovery was not in itself particularly cause for concern, certainly not initially,” Stevens explained. 

However, some buyers have become frustrated with the increasing prices. For instance, Sydney dwelling prices have soared 15.94 percent year-on-year to July 8, according to RP Data daily indices. 

Melbourne has followed closely behind, with a 10.48 percent year-on-year hike. 

That said, softening markets may be imminent. For example, while Sydney prices have increased dramatically year-on-year, in the three months to July 8, growth was just 1.31 percent.

In Melbourne, it was 0.36 percent, while dwelling values in Adelaide dropped by 0.85 percent in the three months to July 8.

For many Australians, homeownership is generally a long-term commitment. Property cycles will see dwelling values lift and drop, putting homeowners in a more comfortable position if they’re financially able to hold onto their properties in the long term.

The RBA is monitoring the situation accordingly.

What’s on the agenda?

Stevens explained that one factor behind the low cash rate is the desire for a pickup in housing construction, which is much-needed in cities with burgeoning populations, such as Sydney and Melbourne.

“Some pick-up in housing prices as a result of lower interest rates was to be expected; it shows that monetary policy is working and is part of the normal transmission process.”

However, Stevens was cautious, noting that this approach loses its persuasiveness if property valuations continue to soar, with potential for markets to swing the other way.

Appropriate financial planning can help Australians realise their individual financial goals.

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Not everyone can be a guarantor. Lenders will generally only allow immediate family members to act as a guarantor but this can sometimes be stretched to include extended family depending on the circumstances.

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