Keeping interest rates on hold a welcome decision for the industry

8 May 2004

The Reserve Bank of Australia's decision this week to keep interest rates at 5.25 per cent was widely applauded by the property industry, but concerns remain over the performance of the residential market.

Housing Industry Association chief economist Simon Tennent says two rate rises have modified new home buyer behaviour and a third was not warranted. "The decision to leave rates on hold is welcome news for an already slowing housing industry," he says.

"New home sales, display home traffic and investment lending have all eased and, with some softening in established home prices and a fall in the volume of loans, we would expect to see the all-important housing credit figures ease back in the second half of the year." Interest rates last rose in November and December and most analysts believe they will not move for the next few months at least, as property values fall. Instead, the RBA will direct its attention to the effect that falling house prices have had on consumer wealth, consumer confidence and consumer spending, says TD Securities chief economist Stephen Koukoulas.

"We will just see how bad this property downturn is to determine which direction rates will go next," he says.

A fall in house prices of between 15 per cent and 20 per cent would put the brakes on consumer spending, Koukoulas says.

"It's that interplay of how consumers respond to the fact that house prices are falling - whether they turn particularly gloomy or whether it takes the froth off what was an incredible surge in house prices over the past six to seven years."

That surge was addressed this week by the Victorian Government, which announced a $5000 cash grant for first home buyers to be paid on top of the federal Government's $7000 first home owner grant. Victorian Treasurer John Brumby says the cash will "give around 26,000 Victorians a substantial helping hand to buy their first home".

However, the grant could cause the residential property market to take off again, warns Paul Nugent, director of independent property consultant Wakelin Property Advisory. First home buyers competing aggressively will create more demand and drive up prices.

This will create a short-term spike in house prices that could affect price ranges at other levels. Nugent says pressure on prices will bring a rise in the number of home finance applications. "If this scenario unfolds, the RBA will have a good excuse to raise interest rates."

While interest rate speculation and cash grants swirled around the lower end of the market, and the new vendor tax dogged investors in NSW, it was business as usual at the top end this week, with the $8.5 million sale of a waterfront home in Sydney's Newport. The five-bedroom house in Prince Alfred Parade was sold by Laurence Schiller of Raine & Horne Mona Vale to prominent Sydney businessman Louis Carroll.

By Tracey Grayson.

Reproduced from The Australian newspaper, 8 May 2004.