Interest rates to keep buyers at bay

While many economists do not expect the Reserve Bank (RBA) to lift rates until May 2011, the official cash rate is predicted to hit 5.5 per cent before year’s end, which could severely impact borrower confidence.

Recent data suggest Australia’s borrowers are already starting to shy away from the property market, following the four interest rate hikes in 2010.

In the year to November 2010, the RBA lifted the headline variable mortgage rate from 6.3 per cent to 7.8 per cent, which contributed to a significant slowdown in property price growth nationwide and across every market segment.

RP Data-Rismark’s Home Value Index shows Australian home values are now lower than March 2010 levels.

Similarly, in the report’s ‘rest of state’ markets, which account for 40 per cent of all homes by number, dwelling values are now below their January 2010 peak.

Average dwelling values across the ‘rest of state’ areas have fallen by 0.9 per cent in the past 12 months, while capital city home values have fallen by 1.0 per cent in raw terms.

The prospect of further rate hikes in 2011 is likely to keep market conditions in the doldrums for the next 12 months or so.

“The expectation of higher mortgage rates will be enough to keep a lid on capital gains across most parts of the country,” says RP Data’s director of research, Tim Lawless.

If, however, the Reserve Bank chooses to keep the official cash rate on hold, dwelling prices may stabilise and grind out capital gains in excess of headline inflation, which is expected to breach 3 per cent by the end of the year.

Of course, a drop in average home values cannot be considered entirely a bad thing, as it could serve to further improve asset-class valuations.

After the first three rate hikes for 2010, Rismark recorded an improvement in Australia’s dwelling price-to-disposable household income ratio, which has fallen from a peak of 4.7 times to 4.4 times.