High mortgage rates 'scare' home buyers

Demand for home loans has experienced the largest slump in four years under the weight of rising interest rates.

In a further sign that the Reserve Bank of Australia's (RBA) high interest rate policy is working to cool demand, new data shows owner-occupier housing finance commitments tumbled by 5.9 per cent in February, ending three months of consecutive growth.

Some 63,800 people secured a home loan in the month, the lowest level since October last year.

"Housing affordability and tighter monetary policy have clearly weighed on housing finance approvals in February and more weakness ahead is likely," National Australia Bank senior economist Spiros Papadopoulos said.

"It's only one month's data, but the RBA's 'substantial' tightening in financial conditions appears to be having its desired effect."

RBA Governor Glenn Stevens recently described the central bank's four interest rate rises since August last year, combined with additional mortgage rate increases by retail banks, as "substantial".

Home loan rates have increased on average 1.35 percentage points in the space of nine months.

On Tuesday, the RBA will release the minutes of its April monthly board meeting, when it left interest rates unchanged.

Mr Stevens will also deliver the seventh annual Sir Leslie Melville Lecture at the Australian National University on the topic of 'Liquidity and the Lender of Last Resort'.

The latest data from the Australian Bureau of Statistics does not take full account of this year's official rate increases, suggesting home loan demand will weaken even further.

"The most concerning aspect is that it largely excludes the impact of the February and March rate hikes," UBS senior economist Adam Carr said.

He said given the speed at which the economy appears to be "capitulating", growth could surprise to the downside this year.

The report follows recent data showing a slowdown in retail spending, a slump in both consumer and business confidence, and signs of waning hiring intentions by employers.

As such, economists are growing more confident that the central bank has finished raising interest rates to curb inflation pressures, even with next week's March quarter consumer price index likely to show a spike in inflation pressures.

The RBA has said it expects annual CPI to jump to around 4.0 per cent in the year to March, but its current forecasts point to it slowing from there, albeit slowly to three per cent by the middle of 2010.

The RBA's inflation target is two to three per cent.

Still, Monday's data showed a growing number of people took out protection against rising interest rates by taking a fixed-rate mortgage.

Of the loan commitments secured in February, 23.8 per cent were for a fixed-rate loan of two years or more, close to the record levels.

Not surprisingly, given the country's housing affordability problems, the proportion of first-time home buyers securing a loan fell to 17.2 per cent in February, the lowest level since August last year.