Will low interest rates make housing affordable?

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property_2One of the biggest hurdles to potential homebuyers realising their dream of buying a home is the ability to obtain finance.  At the date of publishing this article, current interest rates in Papua New Guinea for owner occupied housing from the major commercial banks is around 8.45% to 8.95% with a maximum term ranging between 25 to 30 years.  Historically, the interest rate seems to be on the high and in comparison with interest rates in Australia for owner occupied housing loans, Papua New Guinea’s current interest rates seems rather expensive.

Would a reduction in interest rates enable more Papua New Guineans to realise their dream of owning a home?  Maybe, maybe not.

Low interest rates makes obtaining finance more cheaper.  By having cheaper financing options, it is expected that more people are able to obtain finance provided that they satisfy the other requirements provided by the lender.

But when more people have access to finance and put themselves in a position to buy a home, the housing market can react to this situation with a rise in prices.  The effect of this latter situation is that those who were previously in a position to purchase find themselves short on the price and have to dig deeper into their pockets to meet the difference.  Obviously, those who are unable to meet the difference find themselves in the same situation they started out with – unable to afford.

The low, average and even above average working class are greatly affected by the price rises and while many in this group have their dreams shattered, existing property owners with deep pockets take advantage of the low rates to continue building their property portfolios.

Coming back to our original question of whether interest rate cuts can make housing affordable this may not necessarily be the case.  Low rates may help others realise their dream but it’s possible that the majority of low to even above average income earners can find themselves in a situation that is no different prior to the rate cuts.

The housing market realise a lot in demand and supply and based on current market conditions, the lack of affordable housing on the supply side is a major impediment to potential homebuyers.

Finance can only do so much.  What is needed is more available land to overcome the land scarcity or affordable housing scarcity.

BSP has a homeownership scheme introduced early this year with interest rates as low as 4%.  This is great news for those who qualify and can find a property that is within the K400,000 maximum loan amount cap.  Unfortunately, the current housing market makes it almost impossible to find a property within that maximum cap at the major suburbs in Port Moresby.

The good news though is that it’s possible to find property within this budget on the outskirts of Port Moresby.  So if you don’t mind realising your dream home in suburbs like 8 or 9mile, the opportunity is there.  If this is something that is of interest to you, a good place to start your hunt would be at www.hausples.com.pg.

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