The current property market downturn is shaping up as the mildest ever thanks to strong employment and stable interest rates. In this summary of the latest ANZ Property Outlook Report we explain the factors shaping the housing market and what lies ahead for home buyers.

Home loan borrowers have received an early Christmas present following the Reserve Bank's decision to keep home loan interest rates on hold.

At its regular monthly meeting, Australia's central bank did what most economists had expected and left interest rates unchanged for the eighth successive month.

Interest rates are now tipped to remain on hold well into next year, with the next movement not expected until the September 2006 quarter. Some analysts are even tipping a rate cut as the slowing economy and weakening consumer confidence hit lending.

What's driving rates

The key reason for the continued rate freeze was the surprisingly benign September quarter inflation figures. While inflation stands at a two and half year high, it is still within the Reserve Bank's 2-3 per cent target band.

Some analysts had feared that surging world oil prices and rising domestic petrol prices would push inflation above 3 per cent, thus prompting a follow-on rate rise. But a combination of slower economic growth, softer housing construction and a continued winding down of the once overheated property market have taken much of the pressure off rates.

Where to next

ANZ Bank chief economist Saul Eslake said there was little in the September quarter data to justify a rate hike.

"There is some anecdotal evidence that since the end of September higher petrol prices have been passed through to goods and services. But now that petrol prices are easing back from the September peaks, and with the absence of any hard evidence (of the inflationary impact of higher petrol prices) the Reserve has no particular cause to raise rates."

Mr Eslake said the Reserve Bank was still forecasting a 25 basis point (0.25 per cent rate rise) "sometime in the September 2006 quarter", after which rates may remain on hold for some time.

"We still have one 0.25 per cent increase pencilled in for next year. The basis for this forecast is twofold: we suspect there will be some flow-on from this year's rise in oil prices. ‘'We also think there will be a decline in the value of the Australian dollar, which could also (result in) higher prices for goods and services."

Time to fix

One upside of the rate outlook is the unusually low fixed rates on offer.

"Now is actually a good time to fix," Mr Eslake said. "For the first time in a long time, fixed rates are considerably below variable rates and likely to stay that way for some time. The reason is that around the world, long-term rates are being priced unusually low, particularly given that oil prices and US interest rates are rising."

For example, the comparison rate on ANZ's three year fixed rate loan is 7.17 per cent compared with 7.37 per cent for a standard variable rate home loan. And with rates tipped to rise 0.25 per cent next year, the gap is only likely to get bigger.

"This gap between fixed and variable rates is unusual," Mr Eslake said. "Normally fixed rates are only lower than variable rates when official rates are expected to fall. So for anyone worried about rising rates, the lower fixed rate is like taking out insurance for free."

Further ahead

Three key factors will shape Australia's interest rate outlook over the coming 12 months.

Oil prices – The Reserve Bank will be keeping a close eye on oil price movements and the extent to which previous price rises are reflected in higher prices for goods and services.

The dollar – With the dollar already heading lower, the bank will assess emerging weakness in the exchange rate and the extent to which it is passed on.

Wages – The Reserve is particularly concerned about the inflationary risk posed by rapidly rising wages. Of particular concern is the extent of any ongoing pressure on wages and labour costs from skilled labour shortages.