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Australia Raises Interest Rates

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Australia raises interest rates

Australia's central bank has raised interest rates by a quarter of a percentage point to a six-year high of 6% to combat inflationary pressures.

The move by the Reserve Bank of Australia was widely expected, and comes after inflation hit 4% - topping the bank's 2-3% target.

Inflation has risen as Australia's economy continues to perform well.

It has largely been fuelled by soaring global oil prices and higher Australian fruit prices.



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HPC nicely on course down under.

6% must be eyewatering if you're leveraged up to the eyeballs...

Inflation still well above target, and I don't see oil getting any cheaper. More pain to come. What chances 8% rates by Christmas 2007?

How's this for a bearish report?


HOMEBUYERS across Australia might be better off delaying their home purchases into the New Year as house prices fall following today's rise in interest rates.

The Reserve Bank of Australia today raised interest rates for the seventh time in a row, taking official rates to a fresh five-year high, which is expected to boost the number of people defaulting on home loans.

The central bank lifted the official cash rate by 25 basis points to 6.0 per cent, the second time it has raised interest rates this year. The rate rise will take variable lending rates to around 7.8 per cent, well above lending rates of recent years.

"There is a chorus of analysts saying this will hurt the property market," said Louis Christopher, General Manager of Australian Property Monitors.

Would-be home buyers risked buying properties in a market where values were expected to fall as borrowing costs rose, Mr Christopher said.

"There will be bargains out there over the next six months, but the problem is that there might be more rate rises again so that the bargains of today will be even more of a bargain tomorrow."

"Interest rates and house price do not mix," he said.

"We've been in a housing downturn for the past three years and given higher interest rates, it looks like we're going to enter into a fourth year."

While house prices were expected to fall down in coming months, the best time to buy a property could be in the New Year when vendors who unsuccessfully put properties up for sale in spring this year sought to offload their properties next year.

"Vendors might be more willing to negotiate in the New Year because there might be an overhand of properties in the March quarter of 2007," he said.

The rate rise is expected to add about $35 to the average mortgage repayment. However, in Sydney, where mortgages are the largest, the decision will boost repayments by a much greater amount.

Many homeowners will have difficulty meeting mortgage repayments. A recent survey by NEWS.com.au revealed homeowners would have difficulty meeting mortgage repayments if interest rates rose by 1 per cent (or by another 75 basis points over the coming year).

Of the 1057 people surveyed in June, over half, or 58 per cent of borrowers, expected to have significant difficultly in meeting loan repayments if rates were to rise by 1 per cent.

Many borrowers also said their mortgage was worth more than their home. The survey of found one in three homeowners thought the value of their property had fallen over the past 12 months.

Bill Evans, head of economics at Westpac Bank, said he expected the central bank would need to raise interest rates by another 25 basis points in November because inflation was high.

"My view is that they will need to go again in November," he said today after the rate rise.

"Financial markets are flirting with a September move."

Mr Christopher said property prices could fall another 10 per cent in Sydney and Melbourne given the latest rate rise.

"We would see an additional 10 per cent price decline in Sydney with Melbourne and Brisbane more than likely falling by over 5 per cent. I hate to imagine what it would do to defaults given they are already on the rise,” he said yesterday.

House prices would also fall in Adelaide, but by less than 5 per cent. The same would apply to Hobart, with falls of no more than 5 per cent expected.

Perth prices could still grow if the commodity boom continued - but an end to the boom could see prices tumble, Mr Christopher said.

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