OECD rates warning By Sid Marris November 27, 2003
BORROWERS should prepare for interest rates to rise by a further one percentage point and builders to face a market crash, according to the Organisation for Economic Co-operation and Development.
The OECD has expressed real concern that nations such as Australia, the US and Britain remain highly indebted and may suffer "large wealth losses, especially in the housing sector, should interest rates increase abruptly".
Despite the grim predictions, the OECD's half-yearly report released in Paris last night, is upbeat about the prospects for Australia, with growth predicted at 3.7 per cent next year and 4 per cent in 2005 as the worst effects of the world downturn and the drought pass.
But as a result, the OECD says the highly "accommodative" level of interest rates cannot last, and the rates must move to a more "neutral level" - an official rate of between 5.5 to 6 per cent.
The prediction is in line with comments made by Reserve Bank governor Ian Macfarlane last year that if the economy recovered, rates needed to be set at that level to neither boost nor restrain the economy.
It also follows the collapse of the companies related to property investment spruiker Henry Kaye and a warning from St George Bank chief executive Gail Kelly to the Reserve Bank about the damaging effect of further rises in interest rates.
Market economists over the past four weeks have been predicting a rise at the lower end of that "neutral level", an official rate of 5.5 per cent, not the upper level now suggested as a possibility by 2005.
The Reserve Bank is expected to increase the 5 per cent official rate by another quarter of a percentage point next week, despite signs the initial rise early this month has jolted real estate markets, driving down auction clearance rates.
Mr Macfarlane insists long-term inflation risks are the bank's primary motivation, but the unsustainable growth in credit means there is no time to delay.
Under the OECD's scenario, standard variable mortgage rates would rise from 6.82 per cent now to 7.82 per cent by 2005. This would increase the monthly repayments for a $200,000 25-year loan by $129 a month.
The lift in rates could come at a high cost, with the risk the investor-driven construction market may face a crash.
"There is an upside risk in the short run from a longer-than-expected boom in housing investment, fuelled by buy-to-let investors, which could lead to an eventual sharp correction of construction activity rather than a smooth slowdown," the OECD report says.
Just under half the jobs created in the past 12 months have been in construction.
The report says the global recovery - albeit uneven and vulnerable to shock - would boost business investment and company profits.
But the risks are the global economy would be "more or less forceful than expected", rainfall in rural areas could be insufficient, and the continuing difficulty a rising currency would have for exporters.
Treasurer Peter Costello last night said the growth predictions from the OECD - 3.7 per cent next year and 4 per cent in 2005 - would make Australia one of the fastest growing nations in the industrialised world.
But Opposition Treasury spokesman Mark Latham said the report is the latest in a long line of warnings about the risk of a housing bubble.
"Yet even today in the Parliament, Costello showed his smug and complacent approach by dismissing the Governor of the Reserve Bank's call for national regulation of the property investment seminar industry," he said.
