How The $5 Billion Drop In Mortgage Borrowing Is Hurting Millions of Aussies
It's interesting to note that after discussions with other agents involved in several of this week's sales, the clear difference now is that sellers appear to be understanding that a buyers' financial capability has significantly decreased over the past 6 months. It is this additional financial burden on buyers that is driving the price falls we are now seeing.
With this in mind, an article appeared in Saturday's Australian Financial Review that discusses buyer lending criteria and how the reduced affordability we are now seeing has led to price falls.
The AFR article is our lead story this week.
Please also take note of CoreLogic's National market update which is attached below. The findings for November show that Brisbane and South East Queensland in general are now the Nation's fastest declining property market.
We start with the AFR article "$5 Billion drop in mortgage borrowing hurting millions of Aussies. Please see below:
$5 billion drop in mortgage borrowing hurting millions of Aussies
As interest rates climb, potential borrowers are running from the housing market and it’s causing a $5 billion-a-week problem.
All of a sudden, homeowners don’t want to borrow.
The latest mortgage lending numbers just came out and they are shocking. Mortgage borrowing is down by over $5 billion each month. That is a steep fall, as the top line in the next chart shows.
If you’re trying to sell your house, this makes a big difference. Not long ago, there was an extra $5 billion floating around in the housing market every single month. Now you and every other seller are fighting over a much smaller pool of money: The loans are smaller and there are fewer of them.
As the chart above shows, first homebuyers have been cautious for a while but now investors are fleeing the market too, in a mass panic that threatens to continue.
This is what happens when house prices fall. We saw a similar pattern back in 2017; people got frightened of the property market and stopped borrowing. But if you compare the lines on the charts, this time the drop is steeper.
The RBA engineered this fall in property prices with its run of rate hikes. Since May, it has lifted official interest rates seven times in a row. Official rates have jumped from 0.1 to 2.85 per cent.
The interest rate on a variable mortgage has gone up by about 2.5 per cent. That makes a loan a lot more expensive.
If you were borrowing $600,000 (which is the average new owner-occupier home loan in Australia), you can expect to pay the bank $163,000 in interest if rates stayed at 2 per cent over the life of a 25-year loan, as the next chart shows.
But if rates stay at 4.5 per cent, your interest repayments will be $400,000. That’s a huge increase in the lifetime cost of a loan — about $240,000.
When more money goes to the bank, there’s less to spend on the actual house so we’re borrowing smaller sums and house prices are coming down.
The fall since the peak in Sydney is a little over 10 per cent. In Melbourne the fall since the peak is 6.4 per cent. Across the capital cities, house prices are down 6.5 per cent since their peak earlier in 2022. That follows a big surge in house prices during the pandemic.
Job done?
If the RBA’s job was to cool down the housing market, it could wipe its hands on its overalls and enjoy a cold drink. But that is not its job.
The RBA is actually trying to control consumer prices – supermarket prices, fuel prices, bills, etc. And those prices are still going through the roof.
In fact, the central bank just increased its forecast of prices hikes this year. Now the consumer price index is expected to go up a terrifying 8 per cent, far above the 3 per cent maximum they aim for.
How rate hikes are supposed to work
The way the RBA fights price rises is convoluted. The end goal is to get businesses to stop putting up prices, so they try to reduce the amount of demand on businesses by customers. When businesses have a lot of customers, they can put up prices; when they have few, they can’t.
The RBA is trying to make Australians (households and businesses) buy less from Australian businesses so those businesses stop lifting prices. Unfortunately, this is achieved by making Australians feel poorer.
If our mortgage repayments are higher and our houses are worth less, our budgets are squeezed and we feel poorer. That’s one major way rate rises are supposed to make us spend less.
So far the rate rises aren’t working very well. Despite falling house prices and surging interest rates, Australian households are still spending lots of money – at the shops and on our bills.
The latest official retail trade figures show we spent more in September than in August, and the Commonwealth Bank’s unofficial but more recent data shows spending is high and stable.
No wonder the RBA is expected to keep pushing up interest rates. Official rates are currently 2.85 per cent, but the market expects them to increase to over 4 per cent next year. Adding another 1.25 per cent to your interest rates will add another $130,000 to the lifetime cost of that $600,000 home loan.
I mentioned above that house prices are down 6.5 per cent. Commonwealth Bank reckons we’re not even halfway to the bottom. They think house prices will be down 15 per cent on average across the country, before they start going back up. If you look back at the first graph in this story, you can see that while home loan borrowing has fallen a lot, it is still not back at 2019 levels.
Either way, it seems this pattern of rising interest rates, decreased borrowing, falling house prices, and waiting for inflation to fall could go on for some time.
Please see below Core Logics National Housing Market Update for November 2022.