Rates Decision Will Leave First-home Buyers On The Outer

The Age

Thursday November 9, 2006

By BEN SCHNEIDERS, PROPERTY EDITOR

FIRST-HOME buyers were deserting the Victorian housing market before the Reserve Bank's decision to lift interest rates another 25 basis points, official statistics show, and the outlook could worsen for that key part of the market.

The number of home loan approvals for first-time buyers in September fell for the third month in four in Victoria, according to Bureau of Statistics figures released yesterday. That news came as the average loan to the Victorian first-home market hit a record $216,400, indicating buyers are being forced to borrow more to enter the market.

Five years ago, the average first loan was just $144,200.

The property industry expects first-time buyers and outer suburban markets to be most affected by the RBA decision.

"I think in the outer areas there is some hurt and pain out there," real estate agent Barry Plant said. "I think maybe two years ago when people probably got a rate rise they thought 'ouch', now that we've got several it's probably hurting."

He said the only relief was that petrol prices had eased, helping household budgets.

Mr Plant thought the market had "factored in" yesterday's decision but said further rises in the first half of next year could hurt activity.

Tony De Domenico, the chief executive of the Victorian arm of the Urban Development Institute of Australia, said the rate rises this year would hurt the property industry. "This round of rate rises is certain to have an adverse effect on the first-home buyer market that traditionally buy in new developments in emerging growth corridors and fringe locations," he said.

Warren O'Rourke, from Mortgage Choice, said the decision would remove uncertainty from the market after weeks of speculation.

Another mortgage broker, Craig Dres, from Alliance Property Finance, expects the outer suburbs to be most affected. "In the outskirts, I'm talking about 25 kilometres-plus (from Melbourne), we will see a significant impact. Some are already belt-tightening and this will tighten things even more."

VIEWS FROM THE MARKET

CHALLENGER MANAGED INVESTMENTS

TO DATE, there have been eight interest rate increases since the cash rate began to rise in 2002. But the first five hikes were increased for a different reason from the last three, including yesterday's hike. The first five were to arrest belatedly the house price bubble. The three hikes this year were done because the unemployment rate was too low.

The RBA's three rate rises this year are designed to knock demand on the head. That is because the RBA reckons it must be demand that is causing headline prices to grow by around 4 per cent. But that's not correct. It's supply that's the problem, not demand, supply of fruit and fuel. Excluding those two items, the price of everything else is rising by about 2.5 per cent, which is no cause for rate rises. Unfortunately, rate rises are the wrong answer to the questions confronting the economy.

JPMORGAN

THE RBA has left the door open for another interest rate rise next year, although there was no sense of urgency in their commentary. The brief statement explaining the decision was slightly less hawkish than the market had expected and the AUD fell as a result. JPMorgan expects the RBA to leave policy unchanged in December, but with core inflation likely to remain at the top of the RBA's target band of 2-3 per cent in quarter four, another tightening in quarter one 2007 cannot be ruled out.

Key data points to watch over the coming months are credit growth (especially to households) and the all-important quarter four CPI data due for release on January 24.

COMMSEC

RENTERS will feel the pain of higher interest rates as much as home buyers. Rents are already rising at the fastest pace in 15 years and are set to rise further as higher interest rates cause more investors to retreat from residential property and landlords pass on higher loan costs. CommSec believes that this is the last interest rate hike in the cycle. The next move in interest rates could very well be a rate cut. The onus is on businesses to be more responsible about prices. Businesses were quick to lift prices when transport costs were soaring, but have been much slower to trim prices as those same costs have fallen.

DEUTSCHE BANKIN

OUR view the decision by the RBA to adjust policy, in the wake of the third-quarter CPI, rather than move sooner, that is pre-emptively in October, suggests strongly that the decision to hike was taken somewhat reluctantly by the RBA board.

The bank's view on the global economy is unchanged from that recently presented by the governor in his speech to the ABE, with strength in other parts of the globe offsetting the moderation in the US. The global economy (is) "generally expected to grow at an above-average pace in 2007".

The bank has "acknowledged" the drought, with this replacing the previous acknowledgement of regional economic disparity.

© 2006 The Age

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