Buyers Shrug Off Home Loan Cost

RISING home loan rates have taken little heat out of the booming property market.

Approvals for construction of homes rose 6.5 per cent in April, showing that the housing industry is back to its peak levels of 1984-85.

According to Bureau of Statistics figures released last week, approvals jumped 45 per cent during the past year on the back of lower interest rates -with approvals for private sector houses at their highest level since 1973.

The upward trend in housing approvals may level out over the winter months, but this will still leave a lot of construction work in the pipeline.

In real terms, taking account of inflation, dwelling construction jumped another 3.5 per cent in the first three months of 1988 to 15 per cent above the industry's trough of a year ago.

But last week, Citibank lifted its mortgage rates by 0.25 per cent back to 13.5 per cent for loans under $100,000. The major trading and savings banks are expected to follow suit over the next two months.

Interest rates rose following the Reserve Bank's partial retightening of credit policy through the domestic money markets.

This came about because of the Federal Government's fear that the improvement in Australia's balance of payments was being threatened by ballooning consumer demand.

But it is doing little to quell the demand for housing.

In Sydney over the past week, more than $55 million worth of residential property changed hands at auction. And auction clearances remained around 70 per cent, although that is down from the 80 per cent clearance level of April

Even at the lower price end of the Sydney market - the sector that would seem most susceptible to mortgage rate rises - there is no evidence of a slowdown. Last weekend, Landcom had no blocks to sell.

Dr Frank Gelber, a director of economic forecasting group BIS-Shrapnel, still predicts that Sydney real estate prices will increase 60 per cent in nominal terms (without taking inflation into account) over the next three years.

Rises in professional and commercial interest rates are continuing and the National Australia Bank last week increased its prime lending rate from 14 to 14.75 per cent. But until these feed into mortgage rates, the residential property market will remain robust.

Indeed, the fundamental forces behind the boom have not changed.

Supply in the housing market is critically short and demand has been boosted by:

* The reintroduction of negative gearing.

* The return of investors to real estate after the sharemarket crash.

* The earlier downward shift in interest rates.

* Overseas buying.

* The tax-free nature of investment in the family home.

As Dr David Clark points out in his book, Economic Update: The Fifty Most Important Graphs That Explain The Economy, a rise in interest rates can reduce overall demand as people baulk against higher mortgage payments.

"But this can be countered by expectations of greater capital gains if house prices are rising," Dr Clark said.

Indeed, according to interest rate analysts, the return of negative gearing- which gives owners full tax deductibility for interest payments on investment in rental property - has made housing prices less sensitive to interest rate rises.

Some reckon that loan rates would have to rise a full percentage point before taking any steam out of the market.

A tipped rise of half of one per cent on an average loan of $60,000 would cost only $20 a month in extra repayments.

Dr Clark forecast the housing industry would continue the growth it showed over the second half of 1987 well into 1988, "as long as interest rates do not return to their 1986 levels and despite the negative effects of the stock exchange crash."

He was right.

According to the latest Reserve Bank Bulletin, the weighted average rate charged for new owner-occupied housing loans of $45,000 was 13.04 per cent in April compared with 15.64 per cent a year ago and 15.32 per cent in mid-1986.

This would imply that the market could even absorb an interest rate increase of up to two percentage points before housing prices start to stabilise, and such a rise in loan rates appears unlikely.

Movements in housing rates lag professional interest rates.

This is because the savings banks are the largest source of housing finance and as long as they sustain a steady flow of funds to their vaults without having to lift deposit rates, housing rates can remain unchanged.

In setting its home loan rate, a bank ensures that its interest margin is maintained.

This margin - or interest rate gap - is that between what the bank borrows(the deposit rate) and what it lends (the home loan rate). If it narrows, the bank's profit falls, while the wider the gap, the greater the profit.

As yet, the major banks have made only marginal increases in deposit rates. And the latest statistics on savings bank deposits show that the flow of funds has continued unabated.