What part does the Australian dollar have to play in housing prices? We look at the most likely scenarios.
Since Westpac decided to increase their home loan interest rates, there have been growing calls that property prices have peaked. Even the RBA commented that the housing market may be slowing. At the same time, the Australian dollar looks poised to head below 70 cents for the first time since the GFC.
A sustained drop in the Australian dollar exchange rate, could, over a long period of time play a role in supporting house prices. Here's how:
Overseas buyers and international investors
A weaker Australian dollar has increased interest in Australian property from overseas. Having said that, foreign investment in Australia property still remains only a small percentage of sales. A recent study suggested that Chinese buyers accounted for less than 2% of sales. Continued weakness in the Australian dollar makes buying a property in Australia more affordable for investors but it also leaves them exposed to currency risk if our dollar continues to slide.
If the Australia dollar falls below 70 cents and stays in the 60s for an extended period of time, we are likely to see increased purchases from overseas. Foreign residents, or short-term visa holders will still need to apply to the Foreign Investment Review Board (FIRB). While it is unlikely to drive property prices higher on its own, it should provide enough extra demand to support prices.
Migrants and expats
One growing trend is expats returning from overseas, and buying a home back in Australia. A lower exchange rate has made it easier to buy a property or place a deposit upon their return. If our dollar falls further, we could see a wave of Aussies returning home with foreign currency in their back pocket, eyeing off a home.
Migrants entering Australia have also benefited from the recent fall in the Australian dollar. In most cases, immigrants bring their wealth into Australia in their foreign currency once they have settled.
Interest rates and the Australian dollar
Interest rates are one of the most important factors when it comes to housing costs. As interest rates fall, households have greater capacity to repay their debt. It also gives new home-owners and borrowers the ability to borrow more whilst still being able to manage the repayments. For that reason, low interest rates are generally supportive of house prices.
So how does the Australian Dollar affect interest rates?
Interest rates are set by the Reserve Bank of Australia (RBA). They take into account many factors when deciding to change interest rates including the Australian dollar. At the moment, the Australian economy is slowing down and the RBA knows that a lower Australian dollar will help rebalance our economy as it slows. A lower dollar makes our exports more competitive and helps local manufacturers. It also drives more tourist to our shores.
If the Australian dollar unexpectedly heads back up above 80 cents, the RBA may consider cutting interest rates again in order to bring the exchange rate back down again. On the other side of the coin, if the exchange rate falls further and stays down, it may eventually lead to inflation as imported goods start to cost more. This would pressure the RBA to raise interest rates.
No clear negative impact
Taking into account the different way the Australian dollar is tied to housing prices, we feel that a drop in the exchange rate would not drive housing prices lower. If anything, a structurally lower Australian dollar would provide some limited support to house prices by increasing demand from overseas.
General advice: The information on this site is of a general nature only. It does not take your specific needs or circumstances into consideration. You should look at your own personal situation and requirements before making any financial decisions.
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