Property News

Rate rise inflicts housing pain

9 November 2006

The Reserve Bank's decision today to raise official interest rates for the third time in six months has been criticised by the Housing Industry Association, which claims it will only inflict more pain on Australia's housing industry.

Since the start of the year, homeowners with a mortgage of $250,000 are required to find an extra $122 per month to meet minimum monthly payments.

HIA's Executive Director, Housing and Economics, Simon Tennent, said that while there is no denying the inflationary risks, monetary policy will prove to be the bluntest of instruments when it comes to slowing Australia's two-speed economy.

"The economic divide between the resource rich states and the rest of Australia has never been wider and sadly while the latest increase may cool the hyper inflated west, it will add further to the pain being felt among homeowners and renters in other states," Mr Tennent said.

"There are already worrying signs within the data, in particular the cooling in retail sales, new home sales, declining housing affordability and the potential effect of the drought. Moreover the latest interest rate increase will put further pressure on an already stretched rental market, with fewer investors likely to enter the market and existing landlords being given another green light to increase weekly rents," he added.

"For Australia's 2.2 million mortgage holders, many will need to tighten their belt another notch however, for the 650,000 families who have taken on a mortgage in the past five years, many will be taken to the brink."

"For the new home building industry, many have viewed the recent improvement in dwelling approvals as a return to normal conditions."

"This is most definitely not the case as buyers remain absent and at best, the industry is on track to deliver 150,000 homes in the next 12 months – well short of what the market currently needs," Mr Tennent said.

"With weakness appearing in some key sets of data, it is imperative that the Reserve Bank hold off on any further interest rate rises throughout 2007 until the three increases have been fully absorbed into the economy."

The view is shared by the Real Estate Institute of Australia.

"This will also be yet another deterrent for investors, thereby retarding the supply of rental accommodation and continuing the significant upward pressure on rents," said Real Estate Institute of Australia President Tony Brasier.

"Interest rates are a major consideration for consumers entering the housing market. First home buyers and young people in particular are going to be thinking long and hard before buying in an interest rate environment where there has been three upward movements in six months. They are already cautious about buying, with their share of dwellings financed well down on long-term averages."

"Staying in the rental market is not going to be a simple solution for young people either: with vacancy rates already at extremely low levels, down to 1.5% in some cities, there simply are not enough homes to rent, and what homes are available are attracting significantly higher rents. Another interest rate rise is only going to keep investors out of the market for longer, further worsening the situation," he said.

"Stable interest rates have been a very positive factor for Australian home buyers, helping them enter the market both as first home owners, and as investors seeking to self-fund their retirement," said Mr Brasier.

"That's not good news for home buyers, renters, or for the economy."

According to Jones Lang LaSalle, many commentators are now suggesting this may be the last rise for this cycle. Reasons include; the drought is expected to reduce GDP growth by up to 1%; there is some evidence the previous rate rises are biting with a slowdown in retail sales; and, the US appears to be slowing which will reduce global growth.

According to the real estate giant, the probable next date for another rate rise is 7 February 2007. Currently, the market is pricing in a 28% probability of a rate rise then.

Today's decision has confirmed that Australia has become a "zero sum economy", according to the Australian Industry Group.

Heather Ridout, CEO of AIG, said it is hoped that this will be the last rate rise for some time, as every time rates go up the risks of damage to the economy intensify.

"The decision to lift interest rates today indicates that Australia has become a zero sum economy whereby the eastern states and industries such as manufacturing, agriculture and consumer sensitive sectors are penalised for the high growth in resource intensive states such as Western Australia," Ms Ridout said.

"This is a risky strategy because it is questionable if the rise will have any impact on WA growth and resource activity as this is more captive to the world economy and particularly Chinese growth in demand," she said.

"It will be important that the next federal budget focuses on lifting the capacity and speed limits of the economy while balancing inflationary pressures."