RBA ups rates to 3.5%

November 4th, 2009 |

The Reserve Bank has lifted its key interest rate for a second month in a row as it attempts to keep Australia’s economy on track for sustained growth. Today’s increase raises the cash rate to 3.5 per cent, marking the first back-to-back monthly increase by the RBA board since March last year. Put simply rates could not stay at emergency lows for ever.

”Economic conditions in Australia have been stronger than expected and measures of confidence have recovered,” RBA Governor Glenn Stevens said.

The widely held belief is that the Reserve Bank will hold fire in December, come back in February after it has time to assess the impact of the rate hikes on the economy, and perhaps when it comes back in February will be lifting rates by 50 basis points at that time.

So, what does this mean for the property market?

There is no doubt that price growth has slowed somewhat during October in the First Home Owner market up to about the $600K range. Demand has definitely wound back, coinciding with the first rate hike and the first reduction in the FHG stimulus measures introduced by the Federal Government, a measure designed to prop up the bottom end of the market and lead a ‘bottom up recovery’.

It looks to have worked, along with the better than expected numbers coming out of the economy. The national housing market continued to boom in the September quarter, following a very strong June quarter, with quarterly house price growth at +3.7% – the highest rate in six years.

Nearly all capital city quarterly growth rates have been driven by strong sales of more expensive homes. In Sydney, the country’s largest housing market, median prices in 50% of the most expensive of suburbs grew by nearly triple the rate experienced in the least expensive suburbs.

The ‘top end’ suffered dramatically during the early stages of the GFC. Another quarter of improving employment results and share market increases of 20% has meant that buyers are returning to the top end of the market to purchase properties at prices still below their highs in late 2007.

Consequently, investors are expected to return to the market in greater numbers over the next few quarters as many have been waiting for First Home Owner activity to soften rather than compete in the ‘false economy’ of emergency low interest rates and increased First Home Owners Grants. Investor enthusiasm will be tested if mortgage rates rise quickly, but strong rent returns and the prospect of future capital gains will entice many to enter the market now and early 2010.

Expected house price growth will be underpinned by record population growth and a significant short fall in new housing. With revised expectations the unemployment rate is unlikely to exceed 7% rising interest rates are now the biggest risk to growth.

While the growth seen in the upper end of the market should slow as prices reach and exceed their highs of 2007, moderate to strong growth is still expected across the whole market through 2010. The question as to whether this growth can be sustained throughout 2010 depends on just how far mortgage rates rise in the next six months.