Interest bill for house doubled

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The majority of people in a recent housing confidence survey expect that interest rates will rise.

Thursday, February 21st 2008, 9:00AM

Only 8% of people expect falls.

"That perception reflects the Reserve Bank continuing to express concern about inflation, even though it has not lifted interest rates since July 2007," ASB chief economist Nick Tuffley says.

While that is the perception there has been a lot of movement in rates, in both directions, in recent weeks.

Tuffley notes that the central bank is using high interest rates to rein in inflation and to discourage borrowing and spending.

He says with both higher house prices and interest rates the interest bill to finance a median priced house has more than doubled in recent times (see graph).

This is one factor impacting on home affordability. "Housing is slowing because many otherwise willing buyers find ownership too much of a financial stretch at present," he says.

"It is not a slowdown induced by any foundering of the economy or the associated undermining of job security."

Tuffley suspects there are plenty of want-to-be first home owners just waiting on the sidelines for houses to become more affordable.

"That will put a floor under the housing market and help to limit the extent of any price falls."

"A sizable drop in interest rates would alter part of the affordability equation. But the risk of reigniting the housing market – and triggering ongoing inflation pressure – is one reason why the Reserve Bank is unlikely to rush to drop interest rates.

"For interest rates to fall this year would mean the Reserve Bank views the deflationary influence of a slowing global economy as more than enough to offset the variety of upward inflation pressures."

Another aspect is the monetary policy-induced impact of higher interest rates: to rein in inflation the RBNZ's main weapon is to discourage borrowing/spending and encourage saving. A given debt level now requires larger interest payments. On top of that, the marked increase in house prices makes for larger loan sizes. As a consequence of both higher house prices and interest rates, the interest bill that would be paid to finance the median house price has more than doubled.

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