Editor's Comments: I hate to put water on anyones fire but the Australian real estate market is beginning to concern me.
First and foremost as a pointed out below the main reason real estate is going up is because of extremely low interest rates.
Watching the financial markets daily as I do leads me to believe that most market experts believe interest rates only have one way to go and that's up.
So the if the main reason Australians are buying properties now is low interest rates it may be the main reason that people stop buying when interest rates go up.
Then we will be left with the fundamentals of an real estate investment.
Can I buy a two or three bedroom home or apartment and rent it our for a positive cash flow.
This is my acid test for real estate over the past 40 years.
I hope I'm wrong and prices continue to rise because that's good for Bali when Australians are making lots of money.
But this is a time to be cautious and only buy properties that will do well even if interest rates rise.
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Melanie Duca was relieved to buy a home, after months of searching in a rising market. Photo: Peter Rae
Elizabeth Redman, Kate Burke Mar 14, 2021
Ultra-low interest rates are pushing up property prices, with new figures showing the average home buyer could spend $41,000 more at auction than a year ago.
Interest rates were slashed to boost the pandemic-hit economy and the Reserve Bank this week emphasised it will keep rates low for the next three years even if house prices soar.
With cheaper mortgage repayments, a borrower on an average income of $89,000 who has saved a 20 per cent deposit could have a budget of $806,250, research from comparison website Canstar found.
A year ago, the same buyer would have had less borrowing power and a budget of only $765,000. Both figures assume their home loan was at the lowest variable rate.
Rate Estimated borrowing power Property price with 20% deposit
Lowest variable rate Mar-2020 2.44% $612,000 $765,000
Mar-2021 1.99% $645,000 $806,250
Average variable rate Mar-2020 3.71% $532,000 $665,000
Mar-2021 3.28% $557,000 $696,250
Source: www.canstar.com.au. Prepared on 3/03/2021. Average and lowest variable rates based on owner occupier loans on Canstar’s database.
But with crowds of potential buyers turning up at auctions all armed with more cash, a bigger budget is unlikely to translate to an extra bedroom or more desirable suburb.
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“The house might not be any better — it might just be the same house and they’re just paying more for it,” Canstar group executive of financial services Steve Mickenbecker said.
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“It obviously does push house prices up. There’s no question, people turn up at an auction with more money in their pockets, it means that demand is higher and inevitably that bids prices up.”
Low interest rates may also attract some buyers who would not have been able to afford a home if mortgage costs were higher, adding to competition in the market, he said.
Even someone on a lower income of $50,000 could have upped their budget by nearly $19,000 over the past year, on the lowest variable rate, while a high-income earner on $120,000 could increase their budget by $57,500.
Impact of interest rate on borrowing power
(Annual pre-tax income: $50,000)
Rate Estimated borrowing power Property price with 20% deposit
Lowest variable rate Mar-2020 2.44% $283,000 $353,750
Mar-2021 1.99% $298,000 $372,500
Average variable rate Mar-2020 3.71% $246,000 $307,500
Mar-2021 3.28% $257,000 $321,250
Source: www.canstar.com.au. Prepared on 3/03/2021. Average and lowest variable rates based on owner occupier loans on Canstar’s database.
With prices surging, analysts expect a possible clampdown on lending in coming months, which could target borrowers with small deposits or high levels of debt compared with their incomes.
AMP Capital chief economist Shane Oliver warned that although housing affordability was “pretty poor”, the Reserve Bank was required to focus on the broader economy when setting interest rates.
Impact of interest rate on borrowing power
(Annual pre-tax income: $120,000)
Rate Estimated borrowing power Property price with 20% deposit
Lowest variable rate Mar-2020 2.44% $874,000 $1,092,500
Mar-2021 1.99% $920,000 $1,150,000
Average variable rate Mar-2020 3.71% $760,000 $950,000
Mar-2021 3.28% $796,000 $995,000
Source: www.canstar.com.au. Prepared on 3/03/2021. Average and lowest variable rates based on owner occupier loans on Canstar’s database.
“Their focus is a lot broader than just the housing market and when they do look at housing they look in terms of financial standards,” Dr Oliver said.
“Its primary focus is the economy and particularly inflation and employment,” he said. He warned the travel and higher education sectors were still struggling, while overall wages growth was low. 
Melanie Duca, pictured with dog Jinxy, recently bought a home in Sydney. Photo: Peter Rae
Sydney buyer Melanie Duca was relieved to finally buy earlier this year, after more than six months of searching.
“I had to keep expanding the scope because it was so competitive,” Ms Duca said. “It was really not what I was expecting; the market conditions had improved so quickly.”
After four months searching the lower north shore and eastern suburbs – seeing homes snapped up within days or selling well above price guides – she enlisted the help of buyer’s agent Lauren Goudy, of Rose and Jones, and purchased a four-bedroom home in need of renovation in January.
“I had thought [when I started searching] that I could get somewhere really [completed] and perfectly in my budget,” Ms Duca said. “[But] I compromised in terms of the renovation.”
Ms Goudy said buyers were increasingly having to compromise or head back to the bank, with some clients looking around the $2 million mark increasing their budget by more than $500,000 – especially if they were also selling in the same market, helping them keep pace with rapid price rises.
Ms Goudy, who felt house prices jumped about 20 per cent since November in prime markets among the eastern suburbs, lower north shore, inner west and northern beaches, said buyers would need a sizeable uplift in their budget if they hoped to buy a similar or better calibre property than they could afford late last year.
Jellis Craig managing director Steven Abbott has seen prices rise 5 per cent to 10 per cent in the last six weeks for some segments of his market in Melbourne’s leafy east.
Aside from low interest rates, he cites pent-up buyer demand after last year’s lockdowns and extra cash on hand from cancelled international holiday plans, sparking strong buyer competition.
“[Buyers are thinking] ‘If I extend my budget 10 per cent or 20 per cent, the cost of funding that over time is, at the moment, attractive,’” he said. “It’s just one person’s capacity and perceptions of value over another’s.
“In a market that’s moving, you get less people that are probably telling you what things aren’t worth.”
With Tawar Razaghi
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