Mortgage rate rises 'cooling house market'
5:00AM Wednesday May 09, 2007
By Adam Bennett
Steep mortgage rate increases, particularly for long term fixed loans, will cool the rampant housing market by reducing property's appeal as an investment asset, Westpac Bank says.
The Reserve Bank's two 25-point official cash rate increases, as well as rate rises on wholesale money markets, have led to "huge changes" to fixed-term mortgage rates which are now at their highest levels since the housing boom began, said Westpac economist Dominick Stephens.
Higher debt servicing costs had effectively reduced the value of property for the investors who had been significant drivers of the boom.
As at the end of last year, Westpac calculated the investor value of the median house was $327,000.
This was in line with the Real Estate Institute's median house price at the time.
But with the mortgage rate increases, Westpac's valuation had fallen to $278,000 and the REINZ median house price had risen to $343,500 in March.
"That means buying an investment property at today's prices, while paying today's mortgage rates, is unlikely to yield a good return," said Stephens.
The housing boom was originally driven by supportive economic fundamentals for investors. These included low interest rates, and an increase in the top marginal tax rate.
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