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When the Reserve Bank (RBA) lifted interest rates
by 0.25% on 8-May this year, it described
the residential housing market as 'overheated'
and an 'imbalance' that could end up jeopardising
the economy's continued expansion. For a central
bank, these are unusually forthright comments.
No wishy-washy 'on the one hand, on the other
hand' language or qualifying adjectives. The
message was clear: the housing sector is too
hot, so get ready for an interest rate cold
shower.
The warning was repeated on 31-May when RBA Governor Ian Macfarlane
foreshadowed "returning monetary policy to a more neutral setting."
By then, nearly every financial analyst could see that several
more interest rate hikes were inevitable. Most were forecasting a
rise in the cash rate to 5.5%-6.0% and mortgage rates of around 8.0%.
Less than a week later, the RBA duly raised interest rates by another
0.25% to 4.75% stating that 'ongoing increases in wealth associated
with rising house prices' were an important factor behind the strong
growth in consumer spending and household debt. It also noted that
economic growth was robust and that 'inflation pressures appear likely
to continue in the longer term.'
I see it but I don't believe it
Reaction to the increase in rates has been interesting. While analysts
and journalists have emphasised the impact on mortgage payments, many
property advisers and real estate agents are still downplaying the
likely near-term impact on house prices. Apart from their obvious
interest in promoting market confidence, one of the key objectives
is to reassure residential property investors.
As the chart below indicates, such investors now account for over
one-third of all new housing finance loans. In Mar-02, this percentage
jumped to its highest level since the last property market crash in
1989.
The boom in demand for investment properties
has paralleled the rise in major city house prices and partly explains
the surge in residential apartment approvals. Falling interest rates,
low vacancy rates and energetic marketing campaigns by banks and
advisers have combined to push investor participation in the property
market to a thirteen-year high.
Extract from a Westpac advertisement, Australian Financial Review,
5-Jun-02
But how long can the party go
on? House and apartment prices appear to have peaked
in most capital cities, interest rates are moving
higher and vacancy rates are rising. In Sydney,
rental yields on residential property are the lowest
they have ever been. At the very least, individual
investors should be factoring in the possibility
of falling capital values in the near-term, lower
rental income and interest rates of around 7.75%
in one year's time.
The music might not have stopped but for most investors
it could be time to start dancing closer to the
exits.
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