Interpac Business and Migration Solutions Melbourne Australia

（October 6, 2010）

INVESTORS buying rental properties on the proviso of capital growth could create a housing bubble which would lead to problems, a central bank official says.

Reserve Bank head of financial stability Luci Ellis, in an address to CPA Australia conference in Brisbane, said lower rental yield will mean there is a limit on how far house prices can go.

Asked if the lower yields meant a limit to the rate of price appreciation, Dr Ellis said: "The short and simple answer is - yes".

"If rental yields are very low, investors are buying properties without really thinking abut the rental yield," Dr Ellis said.

"Buying an asset just because you are expecting the price to rise in the future, well that is actually the academic definition of a bubble.

"So that would be undesirable and be seen as a problem." Rental yields have come up lately, Dr Ellis said. She added that RBA considered the recent levelling off in housing prices as desirable, although didn't need to get back to their 1970s levels.

"But they can't go onwards and upwards faster than income forever," she said.

Household debt rising, staying for longer

Despite the bank seeing a levelling out in the household debt to income ratio, that debt is still high, Dr Ellis said.

"Household debt in Australia has come up quite a lot and does seem quite high," Dr Ellis said. "A lot of that increase in debt more recently has been in older households. So instead of paying off their mortgage by 45, they've still got one at 55. "

"So it's increasing the debt most amongst the people who've got the least risk and lowest gearing."

But Australia doesn't have the highest debt levels in the world, especially compared to some European countries, in particular Denmark, where debt levels are 300 per cent compared to disposable income, she said.

Dr Ellis stressed there was no cast iron law or equilibrium level about an aggregate debt to income level because Individuals have many variables in their incomes, ages and financial positions.

"There isn't anything in economic theory that would say that has to be a magic number forever, it's actually an aggregation of many different decisions," she said.
 

(Source:news.com.au)