Property watch: After the rate rise

Author: Michael McNamara
Date: March 10, 2008
Publication: Sydney Morning Herald (subscribe)

The doom and gloomers in the press have had a field day since the Reserve Bank raised the cash rate on Tuesday for the second consecutive month. Dozens of journalists, having scoured Sydney's western suburbs looking for families in distress, pre-planned their reports as if last week's hike was a done deal. But if interest rates are having such a profound effect in the mortgage belt, why then was the case to lift them seemingly so strong and expected?

The RBA's charter is to use its powers to contribute to the stability of the currency, the maintenance of full employment and the economic prosperity of the people. Not surprisingly, many will feel the reasons to raise rates were not clear-cut.

The RBA had to weigh up the impact on the Australian economy and the delicately balanced global financial markets against the stability of the economy from inflation risks. It is obviously more worried about the latter.

In other words, the RBA is continuing to raise rates because our inflationary pressures are more pronounced than it would like. Our inflation is among the strongest in the developed world and this is a concern. In addition, Australia is being propelled by the growing economic power of China.

It worries the RBA that the costs of building materials, petrol prices, fruit and vegetables, accommodation and utilities are all more expensive. Strong property markets in Adelaide, Melbourne and Brisbane strengthened the case to raise rates.

Put simply, strong inflation is bad news. It makes us less competitive as a nation; people on a fixed income, such as self-funded retirees, suffer higher costs of living and the effect of higher wages hurts businesses.

The issue is that perhaps higher mortgage rates don't target big spenders but rather those that can least afford it.

Households in Australia can roughly be split into three: those that own their own home; those paying their home off; and those renting. Interest rates disproportionately hurt the third that have mortgages. They are mostly lower- to middle-income earners, and received little in the way of recent tax breaks. At the ritzier end of town, the more affluent will take the rate rise in their stride. That is why economists refer to monetary policy as a blunt instrument. Keeping inflation in check comes at great expense.

We will no doubt see more subdued property markets this year as wealthier markets start to slow down from the inertia of interest rates. More forced sales will occur there too. Those suffering mortgage stress in strongly growing property markets have options. There are willing buyers if they need to hold a fire sale, and willing lenders in case they need to draw down on equity.

When there is no decent amount of buyers, and lenders are wary of the risks of lending, higher mortgage rates will spell trouble for more people than those currently affected. In weaker markets, there are no options to navigate out of mortgage stress.

Disclaimer: Michael McNamara is general manager of Australian Property Monitors, owned by Fairfax Media, publisher of Domain.com.au.

Story from domain.com.au web site

Property watch: After the rate rise

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