Interest rates and the property market for the rest of the year.

Last week Reserve Bank Governor Gill Marcus left interest rates unchanged at the end of the Monetary Policy Committee’s meeting. Whilst this move wasn’t particularly surprising , Marcus has mentioned in commentary over the last couple of months that in January we entered an interest rate rising cycle. Therefore even though the interest rates didn’t increase now (no doubt a positive for the property market) certain market commentators and predictions are coming out with possible relatively small interest rate increases for the balance of the year.

The question to be asked is if this materialises what does it mean for the health of a vastly improving property market?

I will answer the above in terms of a tangible that can be measured…our stock levels or in other words the properties Wakefields has for sale on its books. In the height of the financial crisis we had vast amounts of property for sale with more stock for sale than what we could possibly sell. In every single one of our branches those levels have more than halved of late and in some instances are as much as two thirds lower than they were back then. As a result we are seeing in general properties remaining on our books for far shorter periods of time and on top of that some single digit price increases. This has been confirmed by all of the major banks with forecasts for house price escalation country wide last year coming in anywhere from 5%- 8% depending on which bank was reporting those numbers.

We are of the opinion that should these potential further interest rate increases materialise, then our stock levels will slightly increase, the days properties are on the market will do likewise and the rate of house price increases will slow. The key determinant in that prediction is the ratio of household debt to disposable income. Whilst that ratio has decreased from a Q4 2008 high of 81.9 % to Q4 2013 of 74.3%, it is still on the high side and means that consumers will be more adversely affected by interest rate increases than if that ratio was lower.

Therefore to be prudent, buyers of property right now must factor in possible interest rate hikes in their buying decisions and ensure they are comfortable with them, and as a nation we must do our bit in trying to pay down our personal debt and thereby improving the household debt to disposable income ratio. If interest rates don’t increase or even if the increases are very minor we expect the current improving property market to continue even further.