Very recently, the Victorian government announced the abolishment of the controversial stamp duty for first-time homebuyers. This ‘lifeline’ to young people struggling to get on the property ladder takes effect from July 2017 and is applicable for any homebuyer in Victoria whose property costs less than AUD$600K.
In a market where experts and market watchers are spouting concern over housing undersupply and skyrocketing house prices, this could well be ‘the road to hell being paved by good intentions’.
Because simple economics tells us that cheaper property prices (in the form of the abolished stamp duty in this case) will stimulate demand. And increased demand in an overheated market will push prices higher in that price range. Even Federal Treasurer Scott Morrison has shared his reservations, which you can read here.
Compounding this is the low interest rates (the central bank slashed rates twice last year) which contributed to the boom in house prices, particularly in Melbourne and Sydney. Experts argue that to put a dent in the housing market, the RBA would need to raise interest rates, which is unlikely due to concerns about inflation and the risk that it would impact the economy significantly.
Sharp increases in interest rates may not be the wisest thing to do because it will affect growth and if anything, the RBA would likely increase rates on a gradual basis.
Which is why it may be some time yet before the prices of property will collapse as interest rates would have to rise to a certain level before the property bubble will pop. An article in The Daily Reckoning reports that when the US housing market blew up in 2007/2008n, it was the result of the Federal Reserve raising rates 17 times (25 basis points each time) from 2004 to 2006.
So it seems most likely that the housing market may well bubble merrily away…and house prices in Melbourne at the very least will continue going higher for some time to come.
Read more at http://bit.ly/2m6wLL1
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