Rate pause too late for many buyers

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THE dream of owning a home may already be out of reach for many budding buyers even though the Reserve Bank of Australia (RBA) has indicated it has done enough in raising interest rates for now.

The minutes of this month's central bank meeting, released on Tuesday, say the board judged it was "prudent" to raise the cash rate again but felt "that this would leave monetary policy well placed for the present".

At the May meeting, the RBA raised the cash rate to 4.5 per cent, the third consecutive monthly increase and sixth hike since last October.

But a new report, also released on Tuesday, showed housing affordability sinking even before the last two rate increases and may collapse to record lows when they are taken into account.

The Housing Industry Association (HIA)-Commonwealth Bank First Home Buyer Affordability survey dropped a further four per cent in the March quarter to be nearly 29 per cent lower than 12 months earlier.

HIA senior economist Ben Phillips said that the April and May rate rises would likely mean the June quarter result will see "affordability crash to the record lows" experienced in 2007.

He said the decline in affordability was due to higher house prices, increased interest rates, and the removal of the first-home buyers boost.

Affordability was worse in capital cities - 30.5 per cent lower than a year earlier - compared to around 25 per cent in regional areas.

"We are yet to see the required level of co-operation between all levels of government to deliver critical housing infrastructure without hitting new home buyers," Mr Phillips said while releasing the data.

The RBA's head of financial stability Luci Ellis agreed housing supply is falling short of the higher rate of population growth, despite some pick-up recently.

"Naturally, that is putting upward pressure on housing prices," she told a residential property conference in Sydney on Tuesday.

But she didn't believe Australia had a speculative housing bubble on its hands, nor would that be desirable.

"It will, therefore, be important for lenders to remain prudent in their standards," she said in a speech.

"It will be equally important for prospective borrowers to have realistic expectations, and not to rely on a hoped-for capital gain in order to service their debts."

The RBA minutes said there were early signs that interest rate increases were beginning to affect consumer behaviour, with retail sales subdued and home loan approvals falling noticeably.

But the board was also conscious that the building stimulatory effects of the resources boom should not result in a material worsening in the medium-term inflation outlook.

This was weighed against the case for pausing in May owing to the "uncertainty in the euro area".

Westpac chief economist Bill Evans said there was "sufficient caution" in the minutes to preclude further rate hikes for the next two months.

The May rate rise was made prior to the subsequent multi-billion-dollar European bailout package and the further deterioration in financial markets since.

"With rates back to normal levels, the opportunity to pause to assess these impacts as well as the ample evidence that the recent rate hikes are now biting seems very attractive," Mr Evans said.