Housing feels the first bite of interest rate rises

Monday 9 August 2004

Higher interest rates have barely begun to bite on household spending but their impact is already being felt in the housing market, says ASB Bank.

By The Landlord

Reserve Bank Governor Alan Bollard has raised interest rates four times this year and signalled more hikes to come. But with only a third of home loans at variable interest rates, the impact lags the rate rises, says ASB chief economist Anthony Byett in his quarterly report on the housing market, released today.

While the official cash rate was raised three-quarters of a percentage point during the first half of the year, the average increase in the home loan rate paid over the same period was only one-fifth of a percentage point, according to the Reserve Bank.

"Rate hikes to come, plus the lagged effects of higher interest rates when people come off their previous fixed rate, will see the interest rate effect bite harder in the current six months," Byett said.

"By the end of the year the extra interest cost will amount to around 1 per cent per annum, or around $900 million."

He said: "Interest rates may still be moderate by historical standards but higher house prices mean the debt servicing to income ratio for a current purchase is now approaching the peak of the previous housing cycle."

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