Wednesday, October 10, 2007

House prices defy relentless interest rate rises

AUSTRALIANS love their patch of land and as money pours into the real-estate market, house prices are expected to keep on rising despite the relentless rise of interest rates.
A survey by and polling firm Coredata has found most Australians, or 54 per cent per cent, believe property prices will rise over the next three months.

Just one in six of the 1530 people surveyed in September – or 16 per cent –thought house prices would fall over the next quarter.

The expectation of price rises comes despite Australians having been hit with multiple interest rate rises, with the most recent rise in August. The official cash rate stands at 6.5 per cent and standard variable home loan rates at 8.32 per cent, both at an 11-year high.

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Westpac today predicted another rate hike in December to 6.75 per cent given strong economic growth and growing inflationary pressures.

"A December rate hike seems the most likely prospect although a delay to February next year cannot be ruled out," says Westpac's chief economist Bill Evans.

House prices rise despite rates

Louis Christopher, the head of research at Advisor Edge, says house prices are rising due to several factors, including strong employment boosting incomes, good population growth and limited growth in the supply of housing.

"In some cities, the supply of new housing has stalled, especially in Sydney, but also in Brisbane and Melbourne, while demand is still growing due to strong income growth and population growth. That is pushing up house prices," says Mr Christopher.

"We've also seen credit firms loosening right up, so people who would not normally have gotten home loans have been getting them, pushing up demand for housing.

"But eventually, if interest rates keep on rising, there will be a breaking point, and house price growth will fall," says Mr Christopher.

Housing affordability to worsen

The steady yet relentless rise in interest rates in Australia over recent years is a prime candidate to explain why housing has become less affordable, according to a Macquarie Bank report on housing.

Macquarie too expects the Reserve Bank of Australia (RBA) to increase interest rates by a further 25 basis points, or possibly more.

"If growth remains strong and the RBA remains alert to potential inflationary pressures, interest rates could rise by another 75 basis points," say the report authors Brian Redican and Hayden Atkins.

"Should the RBA be compelled to tighten policy to address rising inflationary pressures, housing affordability would deteriorate significantly to the worst levels since in the early 1990s," Macquarie says.

On the less likely chance that rates were cut by 1.25 percentage points, due to slowing global growth, Macquarie predicts housing affordability would improve.

"If the RBA was forced to cut interest rates significantly … housing affordability would improve dramatically," the report said.

"Interest payments would decline to around 30 per cent of income which has been sufficient to kick-start activity in the past."

But for now, with house prices looking set to grow and interest rates remaining steady or going up, housing affordability could worsen.

"The most likely scenario – one of modest house price growth – would be sufficient to maintain affordability at current levels. But should house price growth beginning to accelerate back
towards its long-run average level, there will be a marked deterioration in affordability," says Macquarie.

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