Rising rates kill market: Bank
One bank is forecasting that the boom is over for the housing market and interest rate raises are wiping significant value off investments.
Tuesday, July 17th 2007, 12:00AM
by The Landlord
Westpac says there have been “huge changes in housing market fundamentals in the past four months.”
While there hasn’t yet been “any definitive signs of a slowdown in sales activity or prices, it seems only a matter of time.”
Net migration has slowed considerably, dropping from an annual net inflow of 14,700 in November to 10,680 in May.
However increasing fixed mortgage rates are the real market killer.
This year the Reserve Bank has hiked the official cash rate three times and rates are now at very high historical levels. For instance five-year mortgage rates are at their highest level since before the housing boom began.
The minimum carded mortgage rate on offer at the major banks is 8.90% fixed for five years, compared to 7.90% as recently as February.
Westpac believes there are more increases to come.
“Based on our recent research, these mortgage rate increases have dramatically reduced the value of property to investors.
Our estimate of the current median investor value is $258,000 which is well below the current median house price of $347,500 based on figures from the Real Estate Institute.
“Against this backdrop, demand from property investors will dry up. This is likely to be exacerbated by the Government’s recent announcement that they will be cracking down on property speculators attempting to avoid tax. At the same time, high prices and high mortgage rates will be affecting ordinary people’s rent-or-buy decisions.”
Westpac says “on all fronts the housing market looks set to cool.”
However, it is not predicting a sudden drop in house prices.
“House prices typically have momentum, meaning periods of rising prices don’t suddenly stop dead in their tracks. With economic conditions still strong, unemployment low, and the Government’s Working For Families package increasing many people’s take-home pay, plenty of people are still keen to buy property.”
It could take some time before actual selling prices begin to reflect the lower investor value.
“Eventually, we see annual house price growth slowing from close to 15% currently to virtually nil by the end of 2008. In the meantime, sales activity is likely to slow substantially while the number of days to sell will begin to rise.”
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