Australia | Aug 14 2008
By Andrew Nelson
Few will argue that the sharp rise in mortgage interest rates has helped cause a slowdown in the Australian housing market. Housing finance approvals have slumped 27% in five months, seeing house prices slip and dwelling construction track sideways.
Westpac Senior Economist Matthew Hassan points out that the 160bp rise in floating mortgage rates since August 2007 has taken them to 9.6%, a 16yr high and an unambiguously “tight” level.
The result has been a worsening shortage of housing, with pent-up demand estimated to be running at over 130k dwellings and rising, seeing vacancy rates drop to historical lows, and causing rents to skyrocket.
However, with discussion of rate cuts coming from the RBA, Hassan reasons that the substantial pent-up demand for dwellings could mean an upturn may be able to regain traction without rates dropping all the way down to neutral levels (ordinarily around 6.75-7.25%) or lower.
But “what reduction would stabilise the housing market?”, asks Hassan.
He says it would take at least 100-150bps in rate cuts, taking mortgage interest rates to around 8%. This would probably be enough to see a renewed upswing in construction gain traction, all else being equal. He cites the 2007 market as evidence, when an upswing gained traction despite mortgage rates being at 8.1%, which was significantly higher than neutral levels.
Those level, he says, were driven by pent-up demand.
However, Hassan warns that anything over 150bps would risk generating a renewed upturn prices, which the RBA would be keen to avoid.
