Higher interest rates to slow housing sector recovery

A RECENT downtrend in housing activity has shown signs of levelling out after home loan financing rose for the first time since September.


Economists said the 1.9 per cent rise in housing finance in May could be the beginning of the end of a precipitous slide in activity brought on by rapidly rising interest rates and the winding back of generous government grants for new home buyers at the end of 2009.

Economists had expected a rise of 1.0 per cent in May.

First home buyers accounted for 16.1 per cent of new home loans in May, the Australian Bureau of Statistics said today, down from 28.5 per cent a year ago in a period that was marked by a frenzy of buying helped by economic stimulus.

UBS chief economist Scott Haslem said: "The most positive news from today's data is that the sharp down cycle post the end of the first home owner incentives appears to have ended, with lending now up over the past couple of months."

Still, recovery in the sector is expected to be slow, with interest rates expected to continue rising through the second half of 2010 and a back drop of shaky global financial markets likely to take a toll on consumer confidence.

Reserve Bank of Australia is likely to welcome a levelling out in the housing sector as it attempts to steer the economy through a mining boom over the next year, one that will crowd out other parts of the economy like retail sales and housing activity, economists said.

The central bank "won't be at all worried" about conditions in housing, said Stephen Roberts, chief economist at Nomura.

With its eye on aggregate demand across the economy, the RBA is mindful that it must "make room" for the mining boom, which is being fuelled by stellar iron ore and coal prices and solid demand from Asian steelmakers and power generators.

The RBA has already raised interest rates six times since October 2009, making it one of the more aggressive central banks globally. It has been sidelined since May, with the cash rate target at 4.50 per cent awaiting second quarter inflation data on July 28.

With data last week showing unrelenting jobs growth in the economy, a high inflation result could well bring the RBA off the sidelines in August.

Mr Roberts said he expects the RBA to hold off until November, when the case for a further rate hike will be clearer.

Helen Kevans, economist at JPMorgan, said sluggish demand for new home loans can still be expected over the remainder of 2010 "with rising interest rates largely to blame".

Rising risk aversion in financial markets, deteriorating home affordability, falling consumer confidence and the expiration of the expanded portion of the first home buyers' boost will drag on housing demand, she said.

"The downtrend trajectory in home loans should, therefore, resume," she added.
 
(source: The Australian)