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Home loan demand falls for fifth month

Posted by Tamara McDowell on April 13, 2010

The Reserve Bank of Australia (RBA) will raise the cash rate one more time before giving borrowers a long reprieve, economists say, after new data showing that housing finance commitments fell for the fifth straight month in February.

Australian housing finance commitments for owner-occupied housing fell 1.8 per cent in February, seasonally adjusted, to 50,287, the Australian Bureau of Statistics said on Monday.

It was below market forecast of a 1.0 per cent fall in the month and was the fifth straight month of decline.

ICAP economist Adam Carr said the lending data would concern the RBA, causing the Bank to reassess the pace of future interest rate rises.

“It’s pointing to a sharp, broad-based decline in lending activity,” Mr Carr said.

“That would suggest to me that we’re getting to the point where the pace of rate hikes will slow, markedly.

“The RBA will only hike once more and then ease off.”

The central bank has lifted the cash rate five times in the past seven months.

The current interest rate is 4.25 per cent.

Meanwhile, RBA assistant governor Guy Debelle told a Senate committee in Sydney the central bank isn’t trying to suppress demand by raising interest rates.

“We’re trying to ensure growth is at a sustainable pace,” he was reported by Bloomberg to have told the Senate Inquiry into Access of Small Business Finance.

Mr Carr said Monday’s ABS data showed activity already was being dampened.

“It’s already happening,” he said.

“So I would imagine that there’s not a lot left in the tightening cycle in the near term at least.”

He could not predict whether the bank would next raise the rate in May or June, however.

The ABS data also showed total housing finance by value fell by 3.4 per cent in February, seasonally adjusted, to $20.486 billion.

CommSec economist Craig James said that, while the housing finance figures had been affected by the withdrawal of government stimulus, it should give the central bank reason to hold the cash rate steady.

“It’s time for the RBA to move to the side lines and have a greater assessment of what’s going on,” he said.

“They have been more aggressive than what they suggested in their statements and now it’s the most aggressive rate hike cycle since 1994.”

The ABS data showed the number of home loans had fallen for five of the past seven months.

This indicated that the reduction of government stimulus measures, like the first home buyers grant, was having an effect on consumers, Mr James said.

“There’s certainly been a significant retreat from the housing market,” he said.

“It’s been led by first home buyers.”

The federal government has, since September 30, scaled back its first homebuyers grant from $21,000 for new homes to $7000.

Mr James said he expected the housing figures to continue to underperform over the coming months.

“It probably isn’t going to stop there, with interest rates going up again in the latest month.

“More people will be on the sidelines doing their sums to see what they can afford to get into the market.

“Buyers are going to be a little bit more cautious.”

Westpac said the pull back in housing finance commitments was the direct result of the withdrawal of government stimulus measures, and with rising interest rates pecking at demand on the margins.

“(First home buyers) are likely to fall further as some of the surge in response to the scheme would have been buyers bringing forward their purchase decisions to take advantage of the bonus payments,” Westpac said in a research note.

“The winddown in first home buyer demand associated with the end of additional government incentives remains the dominant force, with higher interest rates also dampening demand at the margin.

Westpac said it was impossible to gauge the exact effect of the RBA’s rate rises, when taking into account also the winding back of the first home buyer bonus.



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