Interest rate hike has no lasting impact on property markets


The Reserve Bank of Australia (RBA) has lifted the official cash rate by 25 basis points to 6.75% - an 11 year high following the strong inflation numbers in September. The widely anticipated rate hike will hit those who those repaying home loans as well as renters.

Craig James, chief economist with CommSec says the rate hike will further delay recovery in home construction, keeping the rental market super-tight and putting upward pressure on rents.

"Today's rate hike will have the biggest impact on the housing market. Recovery in the construction sector will be postponed yet again with a pick-up now unlikely until mid 2008 at the earliest. And not only will home borrowers need to find more dollars for the fortnightly or monthly repayment, rents are also likely to rise due to the lack of new apartments on the market."

However, residential Managing Director of Colliers International Grant Dearlove believes Australia's real estate market is unlikely to experience a downturn as a result of the rate rise. He says that traditionally, a rise in interest rates leads to a reduction in sales volumes in the short term but it would not have a lasting impact on the overall residential property market.

"The residential property market has too much momentum for it to be arrested by a quarter of a per cent interest rate rise," says Dearlove. "However, it is expected that there will be a slow down in sales volumes while people assess their personal positions. "The sales activity normally slows for about one to two months before picking back up again."

Dearlove said historically, some of the biggest property price hikes have occurred when interest rates were at their highest.

"My advice would be to check your finances, see what you can afford," he said. "Don't think if you buy -- the value of your assets will go backwards -- the economy in Australia is too strong for rate increases to have a negative impact," he says.

James agrees that for those who are still struggling to gain a foothold on the property ladder, there may be a silver lining. "Those people that have no mortgage may actually stand to benefit from the latest rate hike as it will push up returns on bank and money market investments," says James.

He also noted that while repayments on the average home loan have gone up by around $50 a week over the last three years as a result of rate hikes, the average after-tax wage has increased by $130 a week during the same period. "Plenty of people will feel worse off after today's rate hike, but clearly the move needs to be kept in perspective," he says.

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