Rising Interest Rates

With no changes to official interest rates for the fifth consecutive month, and confirmation by Reserve Bank of Australia (RBA) Governor, Glenn Stevens that we have reached the bottom of the cycle, property owners are preparing for an upward movement in rates.
In 2001, when official rates were cut by 1.50 percentage points over 11 months, they remained unchanged at their lowest level for four months.

“The question now is when rates will rise, rather than which way,” said Real Estate Institute of Australia President, Mr David Airey. Evidence suggests that banks are already taking the possibility of interest rate rises into consideration in their lending criteria for home buyers.
Whilst economic news suggests that Australia has weathered the storm of the financial crisis and that there is some justification for cautious optimism, REIA reminds the RBA that the impact of the Government’s fiscal measures, such as the First Home Owner’s Grant Boost (FHOG Boost), will begin to abate from October 2009.

Although there are signs of a strong recovery in the residential property market, it is still early days and not all capital city markets have recovered to the extent shown with the buoyant Melbourne and Sydney auction clearance rates,” continued Mr Airey.

Commercial property sales are still slow with markets weighed down with commercial investors attempting to unload stock into a market of reluctant buyers, who are finding finance hard to raise. “Lenders continue to be nervous about lending for new development and land projects.

“This will constrain the supply of new property available in 2010 and 2011, placing continued upward price pressure on established property as buyers return into the post recession property market,” he said.

An upward movement in interest rates will exacerbate this problem and put business and project finance borrowers under even greater pressure, as they are faced with higher rates that are generally 2 or 3 percentage points above residential lending rates.

“We would like to see any upward rate decision deferred until early 2010 when figures for the first half of this fiscal year are available so the RBA has accurate information on which to base their judgement,” concluded Mr Airey.

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