A rate rise too far?

The latest home loan approval figures showing a dive in June figures have prompted predictions of a housing market bust by many analysts. And with housing activity a key to the overall health of the economy, some are suggesting that the Reserve Bank may have been a little hasty in raising interest rates in August.

However, today’s employment figures point the other way. A 75,000 surge in jobs is no doubt largely related to Olympic and GST compliance needs, but a strong 15,000 jump in full-time positions means there is still underlying strength in the labour market – not a good sign for wage levels.

While there seems to be no avoiding a sharp decline in new-home construction this year coming off the boom levels of recent years, the picture for the market for existing homes, and house prices, is less clear. But even if the existing-home market holds up, there is now a greater chance that interest rates have peaked. Positive news on wages and productivity in the US overnight which may see rates on hold there will only add weight to a steady-as-she-goes approach here.

Overall, housing finance approvals fell a sharp 14.5% in June. That figure includes a 17% fall in loan approvals for new homes. These are big falls but have been exaggerated by two significant GST-related effects, plus rises in interest rates.

The housing construction boom of recent years has been magnified over the last year by people bringing forward their building plans to avoid the price rises in materials under the new tax. By June however, it was far too late to take out a loan and still get your house built before July and the latest figures reflect this. As well, high construction levels of recent times mean there can be no appreciable recovery in demand expected any time soon.

Add to this interest rates, which have now lifted five times since last November. While the full effects are yet to impact on the economy, the first four rises worth a combined 1.25 percentage points have added almost $100 a month to the average $100,000 loan and really begun to bite by June.

But June also saw home buyers desert the market for another reason. A $7000 Federal rebate for first-home buyers on offer from July 1 (with NSW buyers receiving a further stamp duty rebate from the State Government) should underpin demand in coming months as they return to the market. The July figures should be telling on this score.

The latest housing figures may not mean the disaster for the housing market some forecast, but they may just mean the upward cycle in interest rates may be at an end. Either way, the Reserve Bank has got its work cut out setting interest rates over the next few months as the GST and the Olympics conspire to send economic indicators haywire.