Housing feels the first bite of interest rate rises

By BRIAN FALLOW

Higher interest rates have barely begun to bite on household spending but their impact is already being felt in the housing market, says ASB Bank.

Reserve Bank Governor Alan Bollard has raised interest rates four times this year and signalled more hikes to come. But with only a third of home loans at variable interest rates, the impact lags the rate rises, says ASB chief economist Anthony Byett in his quarterly report on the housing market, released today.

While the official cash rate was raised three-quarters of a percentage point during the first half of the year, the average increase in the home loan rate paid over the same period was only one-fifth of a percentage point, according to the Reserve Bank.

"Rate hikes to come, plus the lagged effects of higher interest rates when people come off their previous fixed rate, will see the interest rate effect bite harder in the current six months," Byett said.

"By the end of the year the extra interest cost will amount to around 1 per cent per annum, or around $900 million."

He said: "Interest rates may still be moderate by historical standards but higher house prices mean the debt servicing to income ratio for a current purchase is now approaching the peak of the previous housing cycle."

This is already showing up in a slowdown in turnover in the housing market and in demand for housing loans. But that slowdown is from a "frenzied" pace last year.

Real Estate Institute figures show activity has declined since late last year but remains above long-term averages.

Another measure - the median number of days it takes to sell a property - has also slowed, from 24 days in late 2003 to 31 days in June. But that is still relatively a brisk pace compared with the average of 40 days over the past 10 years.

Overall, Byett sees the market as more balanced now between supply and demand, taking the upward pressure off prices.

An ASB survey of sentiment in the housing market found only a net 2 per cent of respondents believe house prices will rise, compared with a net 12 per cent three months ago.

In Auckland people expect (by a net 5 per cent) that prices are set to fall.

Byett said the survey had traditionally been a good pointer to prices. "And the anecdotal evidence [from real estate agents] is that prices are no longer rising."

A net 68 per cent of respondents expect interest rates to rise, up from 58 per cent in April. And while more respondents consider it a bad time than a good time to buy, the margin has narrowed, to a net 7 per cent negative compared with a net 18 per cent negative three months ago.

"The pendulum is swinging away from excess demand in the housing market," Byett said.

"Rents appear relatively stable at present which suggests no major housing shortage.

"Meanwhile the population growth rate is slowing - mainly due to lower net immigration - while the supply of new housing remains as strong as ever."