Rate rise tipped after 'hot' auctions

Rate rise tipped after 'hot' auctions

MELBOURNE'S auction market has posted its strongest performance in years, with the clearance rate and prices soaring, heightening fears the Reserve Bank will push the key official interest rate sharply higher on Melbourne Cup Day.

Investors believe the central bank is odds-on to deliver a half a percentage point increase - twice the rise it delivered this month - amid growing signs the economy no longer needs interest rates at ''emergency'' low levels.

Financial markets are pricing in a 66 per cent chance the Reserve will lift its official cash rate from 3.25 per cent to 3.75 per cent, which would add about $30 to the monthly cost of financing every $100,000 of debt.

Home buyers snapped up 82 per cent of the 818 properties that went under the hammer around the city yesterday, despite auction numbers swelling to their highest level this year.

''It was as hot and determined a market as I've seen in my 28 years in real estate,'' said Christopher Koren, director of buyers' advocacy group Morrell & Koren.

Surging demand for property has seen the clearance rate, sales volumes and house prices rise to levels that have not occurred since the record-setting run of the 2007 property boom.

But the unexpected pace of growth has sparked concerns that the property market may be becoming too hot, with the Reserve Bank indicating that raising rates would be one way to temper the market's performance before it becomes unsustainable.

With the property market still moving from strength to strength, analysts say the big question is not whether the Reserve will lift interest rates when its board meets on Melbourne Cup Day, but how large the increase will be.

It follows news showing that Melbourne house prices jumped 6.7 per cent during the three months to September 30, according to figures from the Real Estate Institute of Victoria, and the release of minutes from the Reserve's last board meeting, where rates were lifted by a quarter of a percentage point.

Concern was expressed during the meeting about ''imbalances'' in the economy and the threat of inflation. Economists widely interpreted that as indicating concern that the housing market is in danger of once again overheating, with prices already back to record levels.

But Macquarie's interest rate strategist Rory Robertson believes the Reserve will lift interest rates by a quarter of a percentage point. He said he believed concern about unnecessarily slowing the recovering economy would outweigh its desire to halt the upward trend in house prices.

Robert Larocca, of the REIV, said demand for property was unlikely to be affected by speculation about rates rises. ''The Reserve Bank has been banging the drum quite loudly about future interest rate rises but (yesterday's) performance shows that buyers have already expected the increases and have priced them into their budgets.''

Robert Papaleo, research director for analysts Charter Keck Cramer, said that while Melbourne's property market is ''firing'' it didn't necessarily reflect what was happening elsewhere in the country.

''It's one more thing for the Reserve Bank to consider but whatever action is taken will be made in the interests of the broader economy.''

In yesterday's auction market, agents reported that inner suburban properties were routinely selling for prices far in excess of expectations.

In Northcote, one buyer paid $1,375,000 for a Victorian terrace house - $475,000 more than the reserve.

Buyers' advocate Michael Ramsay said even with the large number of properties on offer yesterday there simply were not enough to go around. ''One person wins and there are still two or three buyers for every property.''