Will rising interest rates hurt the property boom?

The recent boom in the property market may be stopped by interest rate rises flagged by Reserve Bank of Australia Governor Glenn Stevens last week, property experts have claimed.

The announcement comes as auction clearance rates again recorded solid results over the weekend, especially in Melbourne, with the Real Estate Institute of Victoria now expecting a bumper spring.

Glenn Stevens said to Parliament on Friday that the Reserve Bank will raise rates when the economy begins to recover, saying that “normal” rates are higher than the current level of 3%. He said the normal interest rate is in “the fives”, between 5% and 6%.
“What we have at the moment is an emergency setting,” Stevens said. “Extraordinary measures were taken, but when the emergency has passed, you have got to think about withdrawing emergency measures over time.”
“At some point you are going to have to make a response to move away from the emergency setting.”

A 2% increase in the official interest rate would take the standard variable rate to just below 8%.

Some fear the rise in interest rates could put the brakes on the property market’s recent boom, as it would hit recent first home buyers hard and force other struggling householders to sell.

But David Airey, president of the Real Estate Institute of Australia, says the prospect of interest rate rises will help prevent a housing bubble from forming.

“The idea of interest rate rises is to stop the market from rolling forward. There is talk of a boom, and in some cases that’s a bit of a worry because we don’t want to go back to those days where the market was literally rising on a weekly or monthly basis.”

“I think the Reserve Bank will keep an eye on this. We send a message to people to spend within their means and factor in interest rate rises like this. If you’re on the absolute border line of borrowing, you’re going to feel it, but if you factor this in you’ll have sufficient resources.”

But economist Matthew Bell from Australian Property Monitors believes any rise in interest rates will maintain the market’s strength.

“I don’t think interest rate rises will have a big effect in terms of market activity. There’s been a lot of talk about whether these rises will affect first home owners, but I don’t think there will be any big effect in foreclosures. There will be softening demand, but I think there is a big buffer due to the high requirements from the banks.”

Bell also says that, like previous recessions, rising unemployment will not have a big effect on housing prices and foreclosures, and that investors will continue to buy up property.

“I think investors were waiting for the bottom of the cycle, and one of the reasons they have is because there’s not going to be a big price crash now. I think most people recognise that interest rates are the primary driver of the market.”

“That 2% the Governor says will happen won’t happen quickly either, it’ll happen over quite a long period. I personally suspect we won’t even see any more than 25 or 50 basis points before June 2010.”

The comments come as the property market recorded another positive week of auction results. In Melbourne, clearance rates reached 84%, with REIV chief executive Enzo Raimondo saying in a statement the result gives vendors “great confidence as we head into spring”.

A total of 409 properties were sold, with sales reaching $257 million. Auction volumes are also set to increase, with 600 expected in two weeks’ time.

Sydney auction results are also on the rise, reaching 77%. A total of 120 properties were sold, with sales reaching $84 million.

Brisbane recorded a clearance rate of 48%, with 14 properties sold, while Adelaide recorded a clearance rate of 65% with 15 properties sold totaling $5 million.