Perth, Australia -- (SBWIRE) -- 09/23/2014 -- Earlier this month, the RBA has reached a decision to keep interest rates at 2.5 per cent. The rates are expected to continue to remain low until next year before they start to increase.
But soaring property prices is causing the central bank to be concerned.
The RBA has said that a surge in investor demand has caused a dramatic increase in property prices which may make the market susceptible to a crash. A housing crash could undermine many of the actions that the central bank has taken over the last few years.
Record low interest rates were helpful in supporting the economy but according to the minutes of the bank's policy meeting, "Additional speculative demand could amplify the property price-cycle and increase the potential for property prices to fall later." This is certainly a cause for concern as significant price decreases could be a sign of a housing crash.
The RBA has continued to keep rates at a record low for now to maintain rate stability. Following the publication of the minutes, the Australian dollar rose by as much as 0.15 US cents indicating that traders may believe that rates may be increased sooner than expected.
Just in the last year alone, capital city house prices have increased on average by more than 10% with Sydney being closer to 15%. Factors contributing to this explosive growth include low rates, favourable tax treatments for property investments, and increasing demand from foreign investors. Loans for property investors have risen sharply during this period.
The central bank has held steady to its cash rate in an effort to cushion the economy from a slowdown of mining investments. But one thing it has actually done is led to a sharp increase in property prices.
As a result, consumers would be more wary of entering the market due to falling prices. The good news is that increased competition in mortgage lending has not drastically impacted lending standard.
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