Borrowings come home to roost

Australian mortgage holders are bearing the brunt of the Reserve Bank of Australia’s (RBA’s) efforts to curb inflationary pressures, with four 0.25 per cent cash rate movements in under a year.

On top of the four rises so far this financial year (August and November 2007, February and March 2008), which were echoed by most Australian lending institutions, they have faced up to another 0.45 per cent of lender mortgage interest rate rises.

These four official rate increases alone added an additional $170 per month in repayments to an average mortgage of $250,000.

It is no surprise that property owners paying off a mortgage breathed a collective sigh of relief when the RBA kept Australia’s official interest rate on hold in April and May.

It is an interesting market we are seeing at present, with lenders increasing rates outside the RBA cycle (last seen in the 1980s) thanks to the ‘credit crunch’, housing finance demand and property prices slowing, first homebuyers falling out of the market and rental vacancy rates at historical lows.

Housing market

However, property owners could not be dissatisfied with recent trends in median house prices. Median house prices saw healthy growth during the last quarter to December 2007 — good news for existing property owners, but presenting greater challenges for Australians trying to secure their initial foothold in property.

According to the Mortgage Choice/Real Estate Institute of Australia (REIA) Market Facts for the December 2007 quarter, the quarterly Australian weighted average median house price reached $471,294, with the biggest rise experienced in Melbourne (where house prices jumped 12.8 per cent to $485,000). Adelaide was next, with prices jumping 7.7 per cent to $350,000, followed by Brisbane (up 6.9 per cent to $410,000), Hobart (up 4.1 per cent to $330,000), Canberra (up 2.8 per cent to $457,500) and Darwin (up 3.1 per cent to $412,500). Sydney prices rose a small 1.1 per cent to $551,000 and Perth remained stable at $465,000.

The picture was much the same for median ‘other’ property types, with all the major capital cities aside from Perth and Darwin experiencing good price growth.

The next Mortgage Choice/ REIA Market Facts report for the March quarter (to be released in early June) will be a very interesting read, as it covers housing prices, housing sales, rental vacancy rates and rental prices and yields.

This is especially true given the Australian Bureau of Statistics’ (ABS’) house price index, which calculated the average for our eight capitals rose 13.8 per cent in the year to March, but only 1.1 per cent in the March quarter.

It appears that the aforementioned interest rate rises may finally have had quite an effect on housing price growth.

Interest rates

While the RBA continues in its endeavours to keep inflation under control (with underlying inflation hitting over 4.0 per cent in the year to March 2008, far higher than its 2.0 per cent to 3.0 per cent target band) via numerous interest rate hikes, rate movement has not been restricted to this.

Financial institutions, bearing the impact of higher funding costs, have also moved their rates skyward. At time of writing, the growing list of well-known financial institutions lifting their variable mortgage rates outside the cash rate movements stood at eight: BankWest, Suncorp, St George, ANZ, Westpac, NAB, Commonwealth Bank and ING.

The impact of these movements and the RBA’s own movements appear to also be finding its mark in household spending, which has become more subdued in recent months. Australian consumer and business appetite for credit has shown signs of weakening, with the RBA suggesting accumulating evidence of a slowdown in household spending and demand for credit.

Housing finance (seasonally adjusted figures)

Despite historically low rental vacancy rates and continued high migration levels, housing growth is slowing noticeably.

According to the ABS, the total dwelling units approved fell 5.7 per cent in March following a revised fall of 0.8 per cent in February. Private sector housing approvals fell 5.8 per cent after a revised increase of 1.2 per cent, while private sector ‘other’ dwellings approvals rose 0.3 per cent. The value of total building approvals fell 0.1 per cent in March, the value of new residential building approvals fell 6.0 per cent, the value of alterations and additions fell 7.0 per cent and the value of non-residential buildings rose 8.9 per cent.

The fall in the value of owner-occupied approvals for the second successive month by 4.4 per cent, on a seasonally adjusted basis for March 2008, has been driven by the effects of interest rate rises.

Rates have also had an effect in first homebuyer commitments, which (expressed as a percentage of all owner-occupied dwellings financed) fell in March from 17.2 per cent to 16.4, the lowest point in the past 12 months.

In a sector of the market where housing affordability is an issue, this is a concern.

Retail sales

Australian consumers also remain cautious about their spending. Retail trade rose ever so slightly, by 0.5 per cent, in March to a seasonally adjusted $20.177 billion.

Industry commentators suggested this was due to a rebound from weaker data in January and February, however, it would be surprising to see consumers begin hitting the shops in droves, given around one-third of Australians are repaying a mortgage and about two-thirds are repaying a variable loan rather than a fixed.

Economic outlook

There is still plenty of uncertainty surrounding the economic outlook for the Australian economy based on factors such as future inflation figures, trends in household and retail spending, lender and loan product movements in the mortgage market, building approvals and continuing high commodity prices.

According to the RBA, the economy grew at 3.9 per cent last year, but is generally expected to slow to around 3.1 per cent in 2008.

Inflation is expected to fall outside the higher end of the target for at least another 12 months. In a statement, RBA governor of monetary policy Glenn Stevens forecast inflation to remain above the 2.0 per cent to 3.0 per cent target band until 2010.

Stevens remarked that revenue windfalls from higher commodity prices will add substantially to national income and Australians’ ability to spend in the coming months.

While further official interest rate rises cannot be ruled out, the RBA has some time on its hands to assess the extent and sustainability of the slowdown in domestic demand. The next couple of months will bring stronger telltale signs.

Warren O’Rourke is the national manager of corporate affairs at Mortgage Choice.