Significant interest rate rises to affect property, says REIA

A rise in home loan interest rates will not have a short term affect on property prices. But any significant jumps would affect the market, warns the Real Estate Institute of Australia president, Noel Dyett.

He says home owners have proved “pretty resilient” to interest rate rises so far, with people being able to cope with the quarter of a percentage point rises so far. But he warns if there is a significant jump of 1% it would have an impact on property prices.

The REIA today issued its 2008 outlook for Australia. It says two distinct markets emerged during 2007 as housing prices continued to rise across much of Australia.

“In the first home buyer market, declining affordability, now at its lowest point in 22 years, is having a major impact. Buyer numbers have fallen, with first home buyer loans only representing 17.7% of total loans in September 2007, compared with the longer term average of 20%,” says the report.

However there is a second healthier market for established buyers and investors who can leverage equity and higher incomes to cope with the increasing median prices for both houses and other dwellings. This second market was tempered with September quarter housing finance data, which showed some market caution at the threat of interest rate rises.

Although interest rate rises will also impact on yields, investors in 2008 will be attracted by improving yields as rents rise owing to tight vacancy rates across the country,

There was steady growth in housing prices during the year to September 2007. The REIA expects this to continue in 2008 in all states except NSW where the market is more subdued, and WA where prices are settling after a period of large increases. Well-located property, close to employment opportunities and infrastructure, will continue to perform well, the report says.

As prices rise for flats, units and townhouses, many home buyers are considering medium and higher density housing as more affordable options in a market where affordability is very low. “It is likely that this sector will experience ongoing price growth during 2008,” the report says.

In 2008, the main challenges facing the real estate market will be low home loan affordability, the possibility of more interest rate rises, the ongoing fallout from the US sub-prime problems, and an extremely tight rental market driving rents up.

Balancing this are positive signals for the market, including the resources boom continuing to drive prosperity in some states, and solid consumer and business confidence.

So should potential home owners buy now or wait until prices cool off? “You buy when you have the financial capacity,” says Dyett. “Anything might happen.”