KEY POINTS:
Steep mortgage rate increases, particularly for long term fixed loans, will cool the rampant housing market by reducing property's appeal as an investment asset, Westpac Bank says.
The Reserve Bank's two 25-point official cash rate increases, as well as rate rises on wholesale money markets, have led to "huge changes" to fixed-term mortgage rates which are now at their highest levels since the housing boom began, said Westpac economist Dominick Stephens.
Higher debt servicing costs had effectively reduced the value of property for the investors who had been significant drivers of the boom.
As at the end of last year, Westpac calculated the investor value of the median house was $327,000.
This was in line with the Real Estate Institute's median house price at the time.
But with the mortgage rate increases, Westpac's valuation had fallen to $278,000 and the REINZ median house price had risen to $343,500 in March.
"That means buying an investment property at today's prices, while paying today's mortgage rates, is unlikely to yield a good return," said Stephens.
The housing boom was originally driven by supportive economic fundamentals for investors. These included low interest rates, and an increase in the top marginal tax rate.
Stephens believed investors would no longer seek to add to their portfolios, and ordinary home buyers would be discouraged by high interest rates and prices, particularly at the lower end of the market.
"On all fronts the housing market looks set to cool."
Stephens said it could take some time for selling prices to reflect lower investment values because of the market's momentum and relatively strong economic conditions.
But he expected to see some effect in the second half of this year.
"We certainly expect house price inflation on aggregate to slow or even stagnate, and you could see some areas of the market moving backwards, particularly those most exposed to the investor segment.
"If interest rates remain at their current levels for a long time, or go higher, houses could fetch less than they are selling for now, especially at the lower end of the market."
Westpac believed the Reserve Bank might raise the official cash rate again this year and that long-term rates would remain high for some time.
But the bank did not expect "serious fallout" such as widespread mortgagee sales as long as employment conditions remained strong.
