It’s not all bad!

The cash rate has risen for the first time since 2010.

So what will this do to the already softening property market and who will be most affected?

Although housing values are still rising moderately on a national level, data shows that those of Sydney and Melbourne have continued to lose steam through April; the third consecutive month for this trajectory for Sydney. Regional markets, however, have bucked the trend with the imbalance between available supply and buyer demand being held responsible for the growth in housing prices in these areas, albeit at a declining rate as affordability constraints become more challenging.

The annual figures to November 2021 show home values are falling and are expected to fall sharply over the coming months. It is important to remember though that these figures are compared to a period in 2021 where we experienced extraordinary growth so it could be argued that the market is ’normalising’.

What has changed comes down basically to the supply/demand ratio. During the Sydney lockdown, stock levels were so low that buyers were becoming more and more desperate to secure a property and therefore stretched their spend beyond their intention as they competed with other buyers at auction. Riding off this wave in 2022, sellers who had held back because of the uncertainty of the effects of the pandemic and those that were buoyed by the eye-watering prices of 2021 began to flood the market. Not only has this had the effect of reducing competition and in turn reducing prices, it has also caused the clearance rate to drop rapidly as sellers hold on in the hope of achieving their dream 2021 price.

Now that we add the higher cash rate rise to current conditions, the consensus is that we will see a vastly different market with a much more tempered environment. Since the peak of October 2021, factors such as housing affordability, lower consumer sentiment and an increase in stock levels have contributed to the swing in market momentum. With a rise in the cash rate, variable mortgage rates will inch higher thus reducing borrowing capacity and serviceability.

The pendulum has swung back in favour of buyers but they will also be struck buy a diminished borrowing capacity as rates rise. The RBA cash rate and house prices have an inversely corresponding relationship. If the cash rate moves through a rapidly tightening cycle as expected, house prices will undoubtedly fall. However, to put this into perspective, since the onset of the pandemic, national house prices increased around 26%. Should the RBA impose a two-percentage point increase in interest rates, housing prices could fall 15%, bringing them back to their April 2021 level.

A fall in house prices is not all doom and gloom:

• More first home buyers will be able to enter the market.

• Upgrading in a subdued market is more affordable as the gap between the sale price of the existing home and the purchase price of the new home is easier to bridge.

• Most people purchase a property intending to own it for at least 5 – 10 years. Historic data shows that even if there is a drop in price during that time, overall the property will still increase in value.

But what impact will the rate rise have?

• Unemployment is at its lowest rate since the 1970’s. This, combined with higher income growth should keep distressed listings at relatively low levels.

• A large proportion of borrowers are ahead of their mortgage repayments, having maintained the same repayment as rates fell. With the median household well ahead of their mortgage repayments, the risk of households falling behind on their mortgage repayments is reduced.

• Mortgage distress should also be minimised to some extent by mortgage serviceability assessments at the time the loan originated. All borrowers would have been assessed to repay their mortgage under a scenario of mortgage rates being 2.5 percentage points higher than the origination rate, and since October last year, borrowers were being assessed at mortgage rates of 3 percentage points higher. Borrowers should therefore be able to accommodate higher mortgage repayments costs, although such as rapid rate of inflation could create some challenges for borrowers with thinly stretched budgets.

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Published August 4, 2022

By Belinda Cassano