Potential dousing for a warm market

The latest round of house price data clearly shows the market has a strong heart.

Overall prices are up, proving, as I long expected, that the bearish pundits were wrong. They said house prices would fall 30%. While I’m happy to see house prices and activity pick up again there are still plenty of obstacles facing the market.

The obvious one is tax changes – but I promised myself we would not talk tax this week – far too dirty. Instead, the biggest obstacle facing the market may be interest rates.

As our table shows, home loan rates have been rising strongly. Up until recently most of the changes were at the long end of the yield curve, now they are creeping right down to six-month fixed rates.

The only area immune from increase, it seems, are the floating rates. These and many revolving credit rates have been falling to quite low levels. It is clearly the part of the market with strong competition.

The range is from BNZ’s 5.59% for its Total Money product, through to ANZ’s 6.45%.

With revolving credit rates the range is from Westpac’s 5.69% to 6.85% at HSBC.

Adding to the complexity of this market there are a number of lenders with more than one offering. In the past month ANZ has introduced what it calls its “Simple Variable” floating rate which has a few conditions attached, but is competitively priced at 5.69%.

The concern for the property market and house prices is that expectations are building that the Reserve Bank will increase its official cash rate sooner than it has forecast.

There are also growing signs that when the increases come, they will be stronger and higher than many expect.

If this happens it will be like pouring cold water onto a property market that is starting to warm up. We will watch next week’s official cash rate announcement carefully.