Interest rate rise signals recovery
It may mean an increase of $50 per month on the average mortgage, but the Reserve Bank of Australia’s (RBA) decision to increase interest rates by 0.25 per cent is not all bad news.
At 3.5 per cent official borrowing rates remain at historically low levels. The increase may also contribute to increasing the funds available, allowing more lendors to compete for borrowers business.
“With the risk of serious economic contraction in Australia now having passed, the board’s view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker,” RBA governor Glenn Stevens said.
In other words, the interest rate rise is proof positive that Australia has largely escaped the depths of the Global financial crisis. Indeed, that the rate rise is partnered by the Federal Government’s decision to roll back aspects of its economic stimulus package augurs well for our economy as a whole.
Rate rise counterproductive: HIA
Just last month, industry bodies like the Housing Industry Association (HIA) were calling any rise in interest rates “premature” and ironically suggested that it could, in fact, place “undue pressure” on home for sales supply and rental rates.
The consumer price index increased by 1 per cent during the September 2009 quarter, to be 1.3 per cent ahead of the same period 12 months ago. But, highlights the HIA, the “vast majority of the increase in the headline consumer price movement was a strong jump in the interest rate insensitive energy sector”.
“A moderately higher than expected consumer price index result does not provide an excuse for the RBA to rush ahead with a large interest rate hike” said the building industry body in October.
HIA Senior Economist, Ben Phillips continued: “Such a result is hardly a sign of inflation running out of control. Large interest rate hikes should be viewed as both unnecessary and dangerous and will likely dampen the much needed housing recovery, especially rental investment, across the country.”
“Supply side constraints are continuing to place undue pressure on housing rents and home values, especially but not solely in Australia’s capital cities,” Phillips commented.
Q1 Home Sales up but Spring slows down
Meanwhile statistics just announced for the first month of Spring show new home sales fell by 4.5 per cent in September 2009. This followed “a strong surge” in August and overall growth for the first quarter of the financial year.
The HIA survey included Australia’s largest new home builders and identified that first quarter sales were up by 4 per cent overall, but that September saw a 4.3 per cent drop in sales of new detached dwellings. The number of new apartment sales was down by 6.5 per cent in September but up by 4 per cent for the quarter due mainly to a burst of sales in August, the HIA said.
Regional differences were pronounced. NSW and Queensland both posted increases (8.9 and 1.1%) respectively, while Victoria was down 12.7 and WA 11.1. SA was off just 1.1%.
“We saw a late burst of sales from first home buyers in August ahead of the step-down in the first home buyers grant… The stimulus to new home sales from the First Home Owner Boost is now on the wane,” stated Dr Harley Dale, HIA’s Chief Economist.
“With the first home segment weakening, further gains in new home sales will hinge on a return of upgrade buyers and investors. The current level of new home sales points to a shallow recovery in residential building which will lag the underlying requirement for new dwellings.”
According to Dale, delays in planning approvals and land shortages could “combine to blunt the housing recovery”.
He said the Federal Government’s offer to partner with the States and Territories to free new land for development and part-fund urban infrastructure offered “the best opportunity to drive down the cost of new residential development”.
Family home safe from tax
Suggestions that the Federal Government could look to tax capital gains on the family home have been vigourous denying by Dr Ken henry. Henry who is charged with reviewing Australia’s taxation system, dismissed the claims in an interview with the Australian Financial Review.
“Imposing capital gains tax on the family home was not on the cards, just as it wasn’t in 1985, despite hysterical suggestions to the contrary. Scare campaigns about taxing the family home were just as diabolical and plain wrong then as they are now,” Dr Henry told the AFR last month.
The rebuttal came following a report in The Australian which stated: “The Rudd government is considering slapping a wealth tax on the country’s most expensive family homes as part of a wide-ranging and radical review of the tax system chaired by Treasury secretary Ken Henry.”
Though the Federal Government slammed the report when it was published in August, speculation has continued. Henry’s clarification should put the latest scaremongering to bed.
Five reasons why sales are still strong
Meantime real estate industry and pricing expert, Residex, says the general undersupply of housing, new and established, continues to drive values.
According to Residex’s latest information, the median value of Sydney houses is now over $600,000, while the median value of Melbourne units has broken the $400,000 barrier. Sales are up overall with Perth leading the rush via a 36% increase in the last 12 months.
There are five keys reasons for this growth in the housing market, it opines:
- “Our population growth rate of over 2% per year is now higher than all other western countries and is being headed by only a few African and Middle Eastern countries. This year, we'll need to house another 440,000 people, which means around 190,000 new households will want a home. This is double the number of new households in 2002, just seven years ago.
- “Our housing shortage is growing with only 124,000 dwellings being built this year. This is well below what's needed, and the rate of completions is dramatically slowing. In 2002 there were 173,000 new dwellings constructed.
- “Our economy has avoided recession. Unemployment is stable, even falling in some states, and confidence is booming.
- “We will still have historically low interest rates…
- “The recent rush of first home buyers has caused a wave of selling and buying into higher priced markets...”
Location, location, location
In light of these strong market forces, Residex says second and subsequent home buyers will be looking hard at a new set of locations.
Says the company: “The first home buyer boom was greatest in Sydney and Melbourne where it has caused a significant rise in first home buyer suburb property values. Avoid those areas, as further growth is unlikely as interest rates rise and the First Home Owner Grant is wound back. Instead, look to the areas where second and subsequent homebuyers are actively buying with the equity they have gained by selling their first homes.”
According to Residex, the target suburbs are areas whose median value is equal to, or greater than Sydney or Melbourne as a whole.
In Sydney:
- St George, Cronulla, Sutherland
- The Eastern Suburbs
- Inner Sydney
- The Inner West
In Melbourne:
- Brunswick
- Doncaster
- Essendon
- Frankston
- Inner Melbourne
Further afield, Residex says regional considerations will help build momentum is specific areas.
In New South Wales the development of Newcastle port facilities and extension of the Hunter Valley line comes at the same time with planned development of the coal fields in the Gunnedah Basin. Look to towns which will benefit from the influx of workers and infrastructure such as: Quirindi, Narrabri, Gunnedah, Singleton and Maitland
In Victoria a highly significant project is the $4.3 billion Regional Rail Express network. This Residex says will significantly impact household growth in the destination towns where populations are expected to grow by around 67% in the next 15 years. The key centres are: Geelong, Ballarat and Bendigo.
