On the way up! Interest Rates and Property

Australia’s Big Four banking groups, who combined, control 85 per cent of the Australian mortgage lending market, all raised their interest rates recently, matching the 25 basis point rate hike initiated by the Reserve Bank of Australia.

ANZ was the first lender to announce the raising of its variable rate by 0.25% in line with the RBA move. This takes ANZ's variable rate loan to 6.06% from 5.81%.

The bank also raised its fixed rates, with mortgages locked in for one or two years jumping 0.25% to 5.70% and 6.69% respectively. The three-year fixed rate has risen by 0.1% to 7.09%. CBA, NAB and Westpac have followed in quick succession, all raising their variable rates by 0.25%.

Looking ahead, CommSec is forecasting another rate hike on Melbourne Cup day and expects cash rates to hit around 4.5% over the next year. However, some experts believe the RBA will raise rates by less than the market is expecting according to Bloomberg.

"I don't think the RBA can hike as quickly and as much as the market expects," Guthrie Williamson told Bloomberg. "The Aussie dollar is going to absolutely soar. That will hurt our export sector and it's deflationary, so inflation is not a problem." Williamson is a portfolio manager in Sydney at fund management firm PGI.

CommSec noted in its report that the start of the last rate hike cycle in 2002, the Reserve Bank made two quick fire rate hikes before retiring to the sidelines. But at that time the low point for rates was 4.25% - much closer to the "normal" or neutral zone around 5%. "In the past the Reserve Bank has lifted rates a few times before resting to gauge the impact. Therefore, another rate hike on Melbourne Cup day is a safe bet," said Craig James, chief economist with CommSec.

Many industry analysts blasted the rate hike as "too aggressive, too soon", however, real estate agents believe this early rate hike may actually prompt investors and homebuyers to dive into the property market sooner than later.

“Our offices believe that the sudden uplift in rates could provoke the fence sitters into locking in a mortgage.  This could involve a section of fixed interest to insulate against any further increases” said John Mc Cormack, CEO of Starr Partners.

Real estate agents also dismissed comments that the small rate hike will derail the recovery in house prices across Australia.

"This rate rise was not unexpected. I think the confidence in the economy and the real estate market will cancel out any concerns about where rates are headed," said McCormack.

The Reserve Bank of Australia lifted the official cash rates by 0.25% prompted by a slew of upbeat economic data released recently. If the lenders pass this latest rate hike in full, it will add an extra $48 a month on a $300,000 loan taken over 30 years.

The Commonwealth Bank estimate that more than 90% of its home loan customers are ahead in their loan repayments according to CommSec. That is, when interest rates were cut, most customers elected to maintain existing repayments.