Is it a rocky road ahead?

If it’s intrigue you have been after, the property market has done nothing short of deliver it in spades over the past few years.

But what’s happening now and what does it mean for the roughly 3.3 million mortgage holders around Australia?

Yesterday the Reserve Bank of Australia (RBA) lifted interest rates by another 50 basis points. Although it was expected, the fourth rate increase in as many months is going to have some borrowers begin to feel the pinch. At their monthly meeting in May, the board of the RBA elected to commence tackling rising inflation and lifted the cash rate from an emergency low of 0.1% at the start of the pandemic to 1.85% yesterday.

However, it’s not all bad news as the cash rate remains well below the pre-COVID decade average of 2.56%. Furthermore, the RBA predicts inflation will peak towards the end of this year, leading most to believe that the cash rate should start to stabilise next year as inflation pulls back to 2-3%.

In terms of the housing market, higher interest rates affect borrowers’ ability to service their loan as well as their borrowing power, having the immediate negative impact on house prices that we have witnessed since May. But lower house prices and higher mortgage repayments may help to contain inflation through wealth effects and limiting household consumption.

According to Tim Lawless of CoreLogic;

“With forecasts for the cash rate ranging from the mid 2% to the early 3% range, even the best case interest rate scenario indicates that variable mortgage rates will roughly double from their current level. For a household with a $750,000 mortgage, a cash rate of 2.5% implies a variable mortgage rate for a new buyer of 4.81%, adding around $1,011 per month to mortgage repayments relative to the record low rate setting prior to May 5. A cash rate of 3.5% would add approximately $1,477 per month to the cost of a $750,000 mortgage.”

On the ground we have seen that the market has already reacted to the RBA’s policies. We must remember though, that we are emerging from a year in 2021 where housing stock experienced its steepest rise in prices on record so it should not come as a surprise that it was going to undergo some degree of adjustment.

Nationally, home values are already falling at the fastest pace since the Global Financial Crisis (GFC), while Sydney values are declining at the fastest pace since at least the early 1980s, having fallen -5.3% since peaking in mid-February, with most of that decline (4.8%) occurring since May’s cash rate increase.

Where house prices go from here will depend on the trajectory and pace of interest rate changes. Many mortgage holders who had borrowed before the pandemic kept their repayments at the same level, creating a buffer and protection against moderate rate changes. The households that maxed out their borrowing capacity while interest rates were at their record low will be more sensitive and susceptible to even minor rate changes. On the flip side, if the households experiencing distress have owned their property for more than a year, chances are they will have accrued a reasonable level of equity.

Another positive is that the ratio of dwelling values to household income is shifting in favour of mortgagees, as wages rise and dwelling values fall, resulting in improved affordability and accessibility.

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Published August 8, 2022

By Belinda Cassano