RBA "out of its depth" with rates policy

Posted on 4/05/2010  

The decision to increase interest rates yet again – the sixth rise in eight months – confirms the RBA is out of its depth when it comes to devising measures to control the housing market.

So says Leanne Pilkington, general manager of real estate agency Laing+Simmons. “Interest rate increases are clearly having no impact on dampening inflated residential property prices, particularly in New South Wales,” Ms Pilkington says.

I agree with Pilkington’s comments. As occurred in 2007 and 2008 when the RBA was last lifting interest rates, house prices are continuing to rise despite sixth rises in rapid succession. There is, in fact, no historical evidence that increasing interest rates dampens strong real estate markets.

The RBA is inflicting pain on businesses and families without any prospect of achieving one of its key goals, to slow the property market. As Pilkington says, Glenn Stevens and his faceless cohorts are not up the task.

Pilkington claims the key issue is a fundamental imbalance between supply and demand. “We await effective measures to increase the amount of available stock, and all the while interest rate increases are squeezing more and more out of mortgage holders,” she says.

Pilkington, like so many, is misguided in her apparent belief that “governments need to act immediately … by freeing up more land available for housing”. It is major property developers, not governments, which control large tracts of land available for residential development.

Pilkington says the underlying supply shortage should continue to buffer property values and population growth will ensure demand remains robust.

The Real Estate Institute of Australia (REIA) is concerned the RBA has ignored evidence that interest rates should be left on hold. REIA president David Airey says the latest rate increase does little to solve the real problem currently facing the market - supply.

“One of the major issues, which will not be solved by continuous rate increases, is the lack of supply in the housing market,” he says. “Increasing interest rates only makes a bad situation worse by negatively impacting on the ability of developers to service loans, fuelling the issue of a growing shortage.

“The Reserve Bank may continue to increase interest rates in an effort to control house prices - however, while a lack of supply persists and with demand continuing to increase, this is akin to putting a finger in a leaking dam.”

The Real Estate Institute of South Australia (REISA) is disappointed in the decision to raise interest rates again for the third consecutive month, bringing the official cash rate to 4.5%. It says mortgage holders are still adjusting to the March and April interest rate increases, not to mention the three hikes at the end of 2009.

"Allowing a couple of months in between interest rate rises allows careful analysis of our economic recovery plus gives homeowners time to get used to their new repayments,” says REISA Chief Executive Officer Greg Troughton.

The latest rise increases Australia’s cash rate to 4.5%, the highest level since the beginning of December 2008. If lenders match the rise, the average basic variable rate for the 24 lenders on Mortgage Choice’s panel will stand at around 7.1 %.

Mortgage Choice senior corporate affairs manager, Kristy Sheppard said, “Unfortunately for variable mortgage borrowers, we have seen six official interest rate rises in the last eight months and some lenders have moved above and beyond that.

“Mortgage rates are much lower than they were two years ago but that does not offer any consolation to Australians who recently bought their first home or re-invested in the property market.

“Someone with a 30-year variable rate mortgage of $300,000 would have seen their repayments increase by around $300 since the beginning of October last year. For many, that is a big change to their budget and to their spending habits.”


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