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Metropolitan home values continue to climb despite rising interest rates, although price growth in non-capital city markets is much slower, new research finds.

Dwelling values in capital cities rose by 1.4 per cent in February following two per cent growth in January, the RP Data Rismark February Hedonic Home Value Index found.

In the 12 months to the end of February, Australian capital city home values increased by 12.7 per cent.

This compared with falls of around three per cent in 2008.

The report said price gains were more subdued in regional markets with average increases of seven per cent for house values over the 12 months to the end of February 2010.

Rismark chief executive Christopher Joye said that in the six years to the end of 2009, dwelling values in Sydney, the nation’s largest city, rose by 1.3 per cent each year.

“At the same time, per capita disposable household incomes grew by 5.7 per cent per annum,” he said.

“That is, household incomes have risen much more rapidly than Sydney dwelling values over this period, which have actually declined in inflation-adjusted terms.”

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AUSTRALIAN retail sales recorded a surprise fall in February as department store sales cooled markedly, with analysts divided on whether the figures would discourage the Reserve Bank of Australia from raising interest rates at its monthly policy meeting next Tuesday.

Dragging sales lower were weaker department store, clothing and footwear receipts, with cafes and restaurants the only industry group to record positive growth.

In the month, retail sales fell 1.4 per cent to $19.83 billion in February from $20.12bn in January but rose from $19.17bn a year earlier, the Australian Bureau of Statistics said.

Economists surveyed ahead of the announcement on average had expected a 0.3 per cent rise in sales for February.

Sales had risen 1.1 per cent in January on month.

Signs of softness in the economy were also visible in buildings approvals, which fell 3.3 per cent in February from January, though remained 34.2 per cent higher on year.

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YOU have been warned. It looks odd for the central bank governor to tell viewers of the Seven Network’s Sunrise that their renewed property enthusiasm could end in tears on the one hand, but to underwrite abnormally cheap money on the other.

So Glenn Stevens’s morning television jawboning against the startling rise in housing prices suggests that the Reserve Bank will bring forward its scheduled interest rates hikes to as early as this time next week.

Stevens doesn’t want to explicitly target any particular price level for housing assets, as opposed to inflation for consumer goods and services. But Australia’s renewed property mania means that housing prices are “getting quite high”. Borrowers should prepare for “some rise in interest rates”. Assuming otherwise “will prove to be unfortunate”. It’s a “mistake” to think that borrowing to invest in property is a guaranteed or “riskless” road to prosperity. “It isn’t going to be that easy.”

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THE big four banks are doing their best to hold back the tide of negativity that is again colouring people’s perceptions of them as the prospect of mortgage rate rises emotionally outweighs the effect of the global financial crisis.

SAfter a period of flirting with less traditional concepts — Westpac, for example, was promoting environmental sustainability in its campaigns before the GFC — most banks are re-emphasising basic values such as better service and increasing their advertising spending to get the message heard, The Australian reported.

“Banks wanted to be different and un-bank like for a while,” says Paul Rees-Jones, planning director at ad agency Clemenger, which has the National Australia Bank account. “Now we want banks to be banks again.”

NAB’s head of marketing for personal banking, Howard Silby, says his bank — which two weeks ago launched a new campaign promoting the tagline “More give, less take” — is hoping to find a niche for itself as the bank that provides “fair value”.

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New home sales dropped in February, as rising interest rates and the phasing out of housing stimulus discouraged Australians from entering the housing market. Victoria, though, posted a big jump in sales.

Nationwide the volume of homes sales slumped 5.2 per cent in February following a 9.5 per cent increase in January, according to data from the Housing Industry Association. February’s drop comes after the government ended the bulk of the housing grants it rolled out last year to fight the effects of the global financial crisis.

“This stimulus has been highly successful in driving the first stage new home building recovery, but that stimulus will soon start to fade,” said HIA chief economist Harley Dale.

The Reserve Bank raised the interest rate by 75 basis points from October to December, adding about $150 to the monthly cost of an average $300,000 home loan.

The RBA moved again this month taking the interest rate to 4 per cent, with markets expecting another rate hike on April 6. More expensive loans make home ownership less attractive to first time buyers, economists say.

Weaker national new home sales data also follow comments today by RBA governor Glenn Stevens signalling more rate rises in coming months and warning against excessive speculation in the housing market.

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The Governor of the Reserve Bank of Australia Glenn Stevens said interest rates had been too low and could not remain at previous levels, supporting market expectations that more rate rises were due.

Reiterating the RBA’s recent hawkish tone, Mr Stevens also zeroed in on Australia’s booming property market and warned people against speculating on rising house prices.

“We can’t assume rates will remain low. The relationship between the cash rate and what they pay for mortgages or small business loans is what we think is useful,” said Stevens, when asked to define normal rates in an interview with Channel Seven – his first television interview since becoming central bank chief.

“If you look back when the economy was stable and we had low inflation, the cash rate, that is the rate we decide on, the rate has been in the average of 5 per cent,” he said, referring to a period since the 1990s.

“It’s a mistake to assume a riskless, easy, and guaranteed way to prosperity is just to leverage to property,” he said.

Australia’s resilient economy and a rising house market have led the RBA to raise rates four times in its last five meetings. It has said repeatedly that rates need to return to a “normal” level as the economy recovers.

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SELF-MANAGED super funds have been able to borrow to buy property through a warrant trust since September 2007. In the past few weeks federal Superannuation and Corporate Law Minister Chris Bowen announced that the legislation would be amended to ensure SMSFs would not pay capital gains tax when ownership passed from the warrant trust.

Q I have an SMSF that is planning to combine with two other SMSFs and a fourth party to buy a motel. We plan to contribute 40 per cent in cash for the purchase and borrow the balance of the cost. I want to know if this proposal is legal and what is the best way to structure it?

A Generally trustees of an SMSF are not allowed to borrow, except in limited circumstances. One exception is when an installment warrant trust is used to buy the property. Under these borrowing rules the super funds could buy the property and borrow to fund the purchase.

Unfortunately each SMSF would need to have its own instalment warrant trust. This would be an extremely expensive way of structuring the purchase and, due to the borrowing having to be a limited recourse loan, the chance of getting a bank to fund it would be much reduced.

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Federal Treasurer Wayne Swan has admitted it will take some time before Australia’s housing shortage is overcome.

The issue was discussed during a meeting of the nation’s treasurers in Canberra on Friday, amid concerns a housing price bubble is developing.

Releasing more land for residential development had been discussed by the treasurers, Mr Swan said, without providing any more detail.

“The shortage of housing in this country has been a feature of our economic environment for far too long,” he told reporters in Canberra.

“Because it has developed over a long period of time, it’s going to take some time to deal with.”

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INTEREST rates for mortgage holders are about 50 basis points below the decade average, the RBA says.

In a speech today, RBA Assistant Governor Philip Lowe reiterated the central bank’s view that the Australian economy had “relatively limited spare capacity” and that it was likely interest rates would move towards “more normal” levels.

During a question and answer session afterwards Dr Lowe said interest rates for home borrowers were still below average levels.

“The important thing is the level of interest rates that borrowers face, not the cash rate,” Dr Lowe told the Australian Industry Group’s tenth annual economic forum on Thursday.

“At the moment the mortgage rate is still around 50 basis points below the average for the last decade, so the mortgage rate is getting close to the average but it is still below the average.”

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Canberra is applying pressure on Westpac not to increase home loan rates any further at this stage. Westpac would like to raise interest rates again, but feels pressure from Canberra not to do so. Chief executive Gail Kelly reportedly told investors the bank was under pressure to lift rates due to increased funding costs but the prospect of a backlash from Canberra made it cautious.

Both Westpac and Commonwealth Bank had taken on big increases in market share over the last two years, giving them the ability to raise rates more easily than the other two banks. Westpac’s home-lending book expanded at 1.5 times the total market growth. Commonwealth Bank beat system home loan growth by 1.7 times, while NAB (0.76 times system) and ANZ Bank (0.61 times system) fell behind. Westpac chairman Ted Evans said borrowers should get used to a rising interest rate environment.