Magic number closer for rates: housing market

[jenny_pt]

EIGHT per cent is the magic number for the housing market.

Historically, when home loan interest rates reach 8 per cent, the steam goes out of rising housing prices.

Until mortgage rates hit that benchmark, prices will keep growing -- albeit at a slower pace than last year.

In the depth of a global financial crisis last year, and with housing prices crashing in the US and Britain, Australian residential values grew 11.5 per cent. The expected spike in unemployment did not materialise, the government pumped

$52 billion into the economy and interest rates were close to 50-year lows.

This week the Reserve Bank paused after three consecutive interest rate rises, leaving the cash rate at 3.75 per cent. The banks had already done part of the Reserve's job by raising rates above the new figure.

In December, housing prices showed the first sign of pausing, with researcher RP Data recording a 0.3 per cent drop in capital-city values for the month.

So, will strong demand and low construction starts offset rising interest rates?

The lower end of the market is already slowing -- a problem for big developers, which have reduced lot sizes to make homes more affordable.

They are already trying to tap the second and third homebuyer markets, but it will be difficult to retain affordability in the face of rising rates.

The First Homebuyer Grant Boost enabled 185,546 first-time buyers to take out home loans between October 2008 and September last year, when the scheme ended, PR Data notes.

In the previous 12 months, only 123,513 First Home Buyer finance commitments were made and it is likely first-time buyers will settle at that level.

The cities and suburbs, such as parts of Melbourne, where much of this activity took place, could be poised to cool.

Melbourne had some of the strongest growth last year, with prices rising 15.6 per cent, but its housing prices dropped 1 per cent in December, according to RP Data figures. Home loan interest rates are about 6.7 per cent, and if the economists are right, another percentage point will be added this year. It's getting closer to the magic number.

Jenny
Source