It’s Not Enough to Lower Interest Rates

Interest RatesThe housing market may have been stimulated recently by record low interest rates, but continually-lowering interest rates are probably not sustainable. It’s true that lower interest rates can keep the housing market afloat, but rates that are temporarily low do not address overall housing affordability, which is a long-term problem.

The average buyer still contends with too many costs to purchase property, which acts as a significant barrier to entry. Whether they are buying their first home, upgrading, or buying investment property in Perth all segments of the market face these barriers.

What Are the Roadblocks to Investing in Property?

The main reason people struggle to buy property is because the down payment most lenders require is currently relatively large – 20% of the price of the home is a huge amount of money for most people. And if they put less than 20% down, they will have to pay for Lenders Mortgage Insurance, which just increases the upfront costs.

And the reduction in the First Home Owners Grant from $7,000 to $3,000 for established property makes it even harder for first-time buyers, preventing many of them from entering the market at all.

The Australian government has also just proposed an additional transfer tax for foreign investors which will see their barrier of entry also increase.

What Will the Effects of Lowered Interest Rates Be?

Interest rates are already at a record low. In their recent meeting, the RBA may not have lowered the rates again, but they did determine that further cuts are a possibility in the future. Low interest rates may sound like a good thing – and they are, in some ways – however from what I am seeing here in Perth, they may be reaching a point of diminishing returns.

Low interest rates make it easier for individuals to become and remain homeowners, but they are probably not enough to enable many more people to buy property – at least, until the real problem of affordability are addressed. We need to remove the obstacles so that more investors and home owners can enter the market.

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