Interest rate rises are supposed to slow the economy … how then do we explain the surge in house prices in 2007, a surge that came despite two interest rate rises during that year (and after three in 2006)?
The Australian Bureau of Statistics house price index (which calculates the average price across the eight capital cities) jumped by a boomish 12.3% in the year to December.
That was the fastest annual pace since March 2004, when the last Australia-wide housing boom (driven by strong demand for loans) was dying. Brisbane was the stand-out, with an annual rise of 21.6%, Melbourne enjoyed an 18.1% jump and even Adelaide saw a 20% rise. Sydney enjoyed 8% growth but Perth saw prices up just 1.1% in the year as its boom exhausted itself with buyers driven from the market (Perth prices rose by more than 30% in 2006-07).
So on the face of it, the boom is back and lending is strong, but a rate rise later today should add to the pressure for a slowdown shoudn’t it? Well, not so fast. According to the RBA’s own figures, growth in home lending was already at the lowest level for nine years in the year to December. Official Reserve Bank figures on credit growth released last week showed that in the year to December, the growth in housing loans was running at an annual rate of 11.6%, which shows no change since September of last year and the growth rate had slowed from around 13.7% at the end of 2006.
That can’t just be explained by the slowdown in housing loans coming from non-bank lenders who have been forced to curtail their activities by the problems at RAMS and the impact of the credit crunch. The growth in housing advances was slowing before then.
So if the growth in housing loans is running at lower than expected levels, why are house prices surging again, and surging at boom-like conditions in Brisbane, Adelaide and Melbourne in particular? Interest rate rises are in fact a large part of the cause because they erode the affordability of new housing, thereby restraining supply as demand rises for the existing stock of houses. So a tightening of monetary policy today will have (as it had last year) the perverse impact of providing some upward pressure on house price inflation.
House prices in the major cities rose faster than the servicing costs rose last year, which means many home owners got wealthier, while renters and others suffered because of a near 10% rise in rental costs over the year.
So I reckon that all the moaning and groaning about rising mortgage stress should be taken with a great big chunk of salt. We have the unedifying spectacle of hundreds of thousands of people worrying about housing affordability and mortgage stress (so we are told) while the value of their houses climbed at three times the rate of inflation nationally, and by a fifth in three major capital cities.
I reckon there’s a lot of misery guts out there in Australia who don’t know when they are well off.
And finally, the cut-off for mortgage stress is when servicing costs hit 30% or more of income (they were much higher in the 70s and 80s). In Spain, where the housing sector is imploding, it’s over 45%. Now that’s stress.
Watch your inbox for Crikey’s special edition on the Reserve Bank announcement at 2.30pm today.