Australian decision to raise rates “will hurt many”

While the Real Estate Institute of Australia (REIA) recognises that caution is required to manage the economy in the current circumstances, the March 4 decision to raise interest rates will hurt many, according to Noel Dyett, Real Estate Institute of Australia President..

Dyett, who was reacting to the Reserve Bank of Australia’s increase in the cash rate by 25 basis points to 7,25 percent, said “the Australian housing market is not a ‘one size fits all’ model. Likewise, there are two economies in operation, with the commodities-rich States faring much better than other States.”

‘Current domestic and international economic conditions have most commentators nervous about what might happen next. The possibility of an economic slowdown after a sustained period of economic growth is of concern. As well as the interest rate tool at the disposal of the Reserve Bank, the Government has indicated that it will exercise fiscal restraint in the formulation of the 2008 Budget.

‘The Australian weighted average median house price rose 6,4% over the quarter, and 11,8% over the year to December 2007, bringing it to $471,294 (about R3,42m). Whether this level of growth will be sustained over the medium and long term is questionable. There is already anecdotal evidence of a slowdown, particularly at the lower end of the housing market.

‘Because the supply of new housing stock remains subdued, prices have been driven upwards. However, the dampening effects of interest rate rises in November and February on demand and prices is unlikely to be seen until the March and June quarter 2008 data are available, as the number of sales negotiated after the November interest rate rise and included in this price data is relatively small.

‘It should also be noted that price growth is not spread evenly over the Australian market. Prices have flattened in Perth, and in some parts of Western Australia, fell during 2007, following sharp rises in recent years. New South Wales, while showing some modest improvement, remains patchy with growth in some areas, and price declines in others. Even states where there have been strong growth have some regional areas that have not shared the increases, for example, Bendigo in Victoria, and some suburbs of Hobart.

‘Affordability is a significant problem, now at record levels across the country, and particularly severe in New South Wales and Queensland. Rental affordability is also worsening, notably in low-income areas such as Tasmania where incomes have not kept pace with rent increases.

‘Interest rate rises are a blunt tool, directly affecting all home buyers across Australia, including those who have not benefited from equity gains in their property. Renters, too, feel the pain from interest rate rises as lessors raise rents to cover loan costs.

‘The decision is a blow for home buyers. The REIA urges the Reserve Bank to be prudent and take into consideration the complexity of the Australian housing market and forthcoming price data reflecting the impact of interest rate rises, as it makes its decision about interest rates in coming months,’ concludes Dyett.
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