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No housing bubble… yet

ANZ’s (ASX: ANZ) Australia boss, Phil Chronican, says it’s not the low interest rates that are driving property prices, it’s the booming population and short supply.

According to our country’s fourth biggest lender, the Australian property market has a shortage of 270,000 homes nationwide and that gap is expected to grow to 370,000 by 2015. It’s a result of over 30 years of underdevelopment because Australia has only built, on average, 145,000 homes per year whilst in recent times the population has been growing at 376,000 per year. This will be a major factor driving house prices higher in the near future.

According to The Sydney Morning Herald, in just 27 years a house once worth $85,000 would cost 5.5 times that amount or $500,000 today. With interest rates very low however we are getting a two-pronged effect and house prices are growing at their quickest pace in three years. ANZ expects house price growth to steady around 5% in the next year although some regions, such as Sydney, are up about 6.4% already.

Although Mr Chronican believes concern over a housing bubble remains “overstated” he doesn’t deny that property is expensive when compared to income and other assets. He also said that talk of Australia embracing New Zealand-style macro prudential policies is a long way off.

However some economists have become concerned that many investors, including those who are taking advantage of the benefits of investing in both residential and commercial property through Self-Managed Super Funds, are taking on too much debt to upsize. Mr Chronican believes regulators such as the Australian Prudential Regulation Authority and the Reserve Bank are not “anywhere near” needing to enforce tougher lending rules but banks have already started increasing ‘buffers’ on loans. A ‘buffer’ tests a loan applicant’s ability to continue to service it if interest rates rise.

It’s important for investors to know their borrowing limits and what they are getting themselves into when investing in property because, contrary to popular belief, Australia is not immune to a housing correction. “It is not impossible to imagine a major economic downturn, a reversal in our net migration data and a significant lift in unemployment having a major impact at some future date … what is also clear, though, is that we do not face such a prospect in the foreseeable future.”

Foolish takeaway

If house prices grow at 5% per year, the RBA will “tolerate” the moderately increasing prices in order to kick start the rest of the economy. If interest rates remain at 2.5% or go lower, property won’t be the only market to get a boost. Equities markets and high yielding dividends stocks like the banks, Telstra (ASX: TLS) and Wesfarmers (ASX: WES) will become more appetising when compared to term deposits and bank accounts.

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Motley Fool contributor Owen Raskiewicz does not have a financial interest in any of the mentioned companies.

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