Strong demand and limited supply boosting property prices

A recent report on the Australian property market shows that demand for property is still strong and prices are still rising, but if interest rates reach 7 per cent growth would be likely to subside.

Price is determined by the interaction of demand and supply. According to the CBA Global Markets Research report, written by chief economist Michael Blythe, demand is high and supply is low, which causes prices to rise.

In the 12 months since March 2013, house prices in Australia rose 10.7 per cent and unit prices increased 9.6 per cent, both figures high compared to changes over the last decade. Sydney led the growth, with dwelling prices rising 15.6 per cent, closely followed by Melbourne, where prices increased by 11.6 per cent.

When analysing the factors that are increasing demand, Mr Blythe found that population growth is nearing the highest it has been in the last 40 years. Put simply, that means there are more people wanting to buy properties.

The population growth is largely due to a higher birth rate and an increased migration rate, with many migrants being highly skilled and in a financial position to purchase a property. The current low interest rates are also making property investment an attractive option and foreign investors are another factor influencing demand, purchasing approximately one in 30 of the properties for sale.

The limited supply of properties amplifies the levels of demand as buyers’ choice is limited, with an average of only one in 20 properties sold each year. New constructions have an impact on increasing the supply of dwellings, averaging 2 per cent growth in supply each year.

The RBA should be pleased with the state of the property market as their plan to stimulate housing activity worked, raising household wealth, improving market sentiment and increasing property purchases and new constructions.

The RBA’s governor, Glenn Stevens, described how a 10 per cent per annum growth in house prices on an ongoing basis would be “unwelcome” which indicates that further stimulation isn’t required and that the likely next move for rates is up.

In previous housing booms, the heat was taken out of the market when interest rates rose 20 per cent. In the current market, that would translate to mortgage rates reaching 7 per cent.

 

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