Record low rates will make Australia's hottest property markets even hotter

 At a time when house prices in Sydney and Melbourne are already rocketing, investors have been given another incentive to plough their cash into real estate. Let's hope our regulators can keep a lid on things, because investor-led property booms are more at risk of a crash, writes Sheryle Bagwell.

Glenn Stevens has just handed the bulk of Australian households a gift of, on average, $44 a month.

That's how much Australians will save in monthly interest payments on the average $300,000 mortgage following the Reserve Bank's decision on Tuesday to take the cash rate down by another 25 basis points to a record low of 2 per cent.

That's presuming the banks will pass on the rate cut to their mortgage holders - which is what they are likely to do.

And of course, this only applies to mortgage holders. Some 67 per cent of Australian households own their own home either with or without a mortgage. But for many young first-home aspirants, the Australian dream of owning your own home is becoming increasingly that - a dream.

House prices in Sydney have rocketed up more than 30 per cent in the past three years as interest rates have fallen. Soon the median price for a house in Sydney will hit $1 million. This latest cut will only provide more fuel for that fire.

The other big losers out of this rate cutting cycle are of course savers - meaning most of our retirees. The returns on their nest egg will take another hit - as this cut will almost immediately be passed on in the form of lower term deposit rates.

But again, it's all win-win for the property market, particularly on the East Coast.

Lower mortgage rates will give investors another incentive to plough their cash into real estate, which in turn will likely push up house prices in the hottest markets of Sydney and Melbourne, along with the fees and returns for banks, mortgage brokers and real estate agents.

Those real estate investors will likely include an increasing number of self-funded retirees searching for better returns than they are getting on cash. They will take on more risk just when they should be playing it safe. But that's what happens in a low interest rate environment.

Should we be worried? Clearly the RBA isn't or it wouldn't keep cutting rates. It's more concerned about the broader economy, which is growing at a sluggish pace as the transition away from mining stalls.

Business confidence, and thus investment, is falling. The animal spirits have gone in to hibernation. The RBA is hoping another interest rate cut will stir them - but some economists have their doubts.

Former RBA Board member Warwick McKibbin told the AFR today that further rate cuts were not the answer for an economy that needs significant structural reform. This rate cut didn't even cause the dollar to fall - it actually rose on the likelihood this will be the last rate cut this cycle.

That's some small mercy for those who still aspire to be home owners in this country. But will that be enough to put a lid on house prices?

In his statement following the rate cut decision, Glenn Stevens noted the booming Sydney property market, but added the trends were varied in other cities. True, the growth in house prices has been far more muted outside Sydney and Melbourne this past year. But then, these are Australia's largest cities.

Sydney alone contributed almost 40 per cent of Australia's growth last financial year, according to a report by consultancy SGS Economics & Planning. But Glenn Stevens thinks the RBA's sister regulator the Australian Prudential Regulation Authority can handle it. He says the RBA "is working with other regulators to assess and contain risks that may arise from the housing market".

Let's hope APRA pulls out the fire hose soon. One in three home buyers at present is an investor. Lending to investors has risen more than 10 per cent in the past year - a level that should now be attracting the attention of the regulators.

An investor-led property boom is more at risk of a crash - because investors tend to be more highly geared. They are therefore highly vulnerable to a change in economic circumstances.

Little wonder the IMF is reportedly sending a crack economic team to Australia to take a close up look at the housing market for itself.

The above is an abstract from http://www.abc.net.au/news/2015-05-05/bagwell-record-low-rates-will-heat-up-the-property-market/6446764

Caroline He

Four C Realty