Australia | Aug 08 2007
By Chris Shaw
The Reserve Bank of Australia (RBA) lifted official interest rates by 0.25% today and the housing market data for June released this morning suggests the move was justified given the RBA’s focus is on keeping inflation from getting out of control.
As TD Securities senior strategist Joshua Williamson notes, while housing finance commitments for owner occupiers rose only 1.1% compared to market forecasts of a 2% increase, the value of these commitments rose 6% and for investors the value of commitments rose a full 15%.
What this means is the current shortage of new housing will continue, driving rents higher until this eventually spills over into higher levels of new dwelling activity. As this occurs, Australia’s economic growth will receive a further boost.
In the meantime though the continued pressure on rents from a tight housing market will increase the inflationary pressures in the economy, meaning today’s rate hike is unlikely to be the last and a further increase is likely in 2008. Williamson’s view is the risk is to the upside, meaning it could come even sooner than that.
It also means the lack of affordable housing for first home buyers is likely to continue, with Commonwealth Bank economist Joseph Capurso noting this sector of the market only accounted for 17% of total financing in June against its longer-term average of 21%.
It is a view shared by ANZ Bank head of financial system analysis Paul Braddick, who takes the view housing affordability will deteriorate further as like last year’s increases in official rates were offset by tax cuts and gains in household income levels today’s increase will be insufficient to derail the current strong momentum in housing prices.
Westpac senior economist Andrew Hanlan suggests today’s rate hike will have some impact on demand, but he expects it will only prove to be mild given underlying economic conditions remain strong.
He adds the current shortage of supply, coupled with recent increases to both job security and household incomes, mean activity levels in the sector should remain solid. On the plus side, he points to some evidence of increased construction activity to meet the ongoing growth in housing demand, as he notes finance for the construction of new dwellings rose 3.2% for the month.
While this is a positive the outlook remains of a market working against first home buyers in particular thanks to limited affordability, a trend that appears likely to continue.