Want to know when higher interest rates may hit house prices? Look to the US

The US provides a sneak preview as to how quickly rising interest rates will impact demand for housing. Picture: NCA NewsWire / David Swift

Australians are being given a sneak preview from the US on how quickly higher interest rates will impact demand for houses.

Whereas in Australia and in most other countries housing interest rates are tied to official rates set by the central bank, in the US most housing loans are longer term and interest rates are tied to the US 10-year bond rate.

And so in Australia, while our longer-term fixed-rate loan-interest rates have increased, the continuation of low-flexible rates has meant that there has been little or no impact on housing demand from the global trend to higher interest rates.

But in the US, the 10-year bond rate has risen by about one per cent since mid last year and so housing interest rates on new loans have risen by a similar amount.

And Australia’s Reserve Bank is being widely tipped to increase our interest rates by at least one per cent in the year that will follow the Federal election. Some believe it may even act sooner.

In the US, because housing loans have a fixed interest rate for up to 30 years, the actual economy is not impacted by the burden of higher mortgage payments on existing home borrowers. However, those looking to buy a home are immediately affected in the same way as Australia.

When rates started to rise last year, American buyers at first seemed unfazed, some even rushed to get in before rates moved higher. Now it’s a different story.

Mortgage applications to purchase a home dropped 10 per cent last week compared with the previous week and were 12 per cent lower year-on-year.

Sellers are pulling back and the total stock of US homes for sale was down 28 per cent nationally in January from a year earlier.

US inflation is one of the great global concerns because the higher US 10-year bond rate impacts the cost of money globally. With oil continuing strong, there are fears that the high rate momentum will continue for an extended period.

Accordingly in the US, housing loan demand fall we may be looking at one of the first signs that the US economy is about to respond to higher interest rates.

If that is so then the US 10-year bond rate may be nearing its top.

For Australia, higher home interest rates have a much bigger impact then in the US because not only is demand curbed but, because housing interest rates are flexible, monthly mortgage payments also rise.

China is trying to tackle the cost inflationary cycle in commodities by clamping down on the trading and stockpiling of commodities like iron ore.

But if oil keeps surging in price, that will have limited impact. Indeed this week we saw the rise in oil prices spread to the buying of agricultural and other commodities including gold.

Australia is, of course, a beneficiary from any sustained global inflation driven by commodities. But on the local front, the movement in housing interest rates is the most powerful weapon the central bank has to slow economic activity and inflation. The conflict between these two thrusts will be a centre of world attention in the months ahead.