More Interst Rate Rises- The Impact on House Prices & The Economy

With interest rates going up again last week, the media’s focus turned to the ramifications for both house prices and the economy. 

It doesn’t seem that long ago that we were told “No interest rate rises until at least 2024” and yet last week's latest rise is now the 10th rise since early 2022. 

Two separate articles that appeared last week in the Australian Financial Review are discussing the impact of the latest interest rate hikes and what might lay ahead. 

These two articles are our features this week...

Please see below:

Rate rises slash borrowing capacity by 30pc

Ten consecutive interest rate increases have lifted mortgage repayments by 50 per cent since April last year and added more than $1000 a month on an average mortgage, according to Canstar.

Homeowners with a $500,000 mortgage paying principal and interest have been hit by a further $82 a month, and increased their repayments to $3154. Since the RBA started raising interest rates, repayments have climbed by $1051 each month.

For those with a $1 million mortgage, the latest rate increase has added $164 to their repayments, which have jumped to $6308 a month. Since April last year, mortgage repayments on a $1 million home have risen by $2100.

Mortgage broker Redom Syed of Confidence Finance calculated the latest increase had slashed borrowing capacity by 2.5 per cent, while the RBA’s 10 increases since April last year had slashed loan limits by up to 30 per cent.

This means homebuyers looking to purchase a $1.5 million home on a 10 per cent deposit will now need to earn a $265,000 joint income, a sharp increase from a $200,000 minimum income a year ago. A solo homebuyer would need at least $250,000 a year to qualify for that loan amount, Mr Syed said.

“Basically, you would need to get a 30 per cent pay rise to get around the 10 interest rate rises,” he said.

RateCity estimated that the maximum loan amount a family of four earning an average wage can borrow has dropped to $674,400 in today’s rate environment, down from $878,400 before rates started rising.

For a solo borrower on an average income, their borrowing capacity has been cut to $534,500 from $684,100.

All the big four banks have increased their standard variable interest rates by 0.25 of a percentage point, taking the average to 7.99 per cent. The average discounted rate for variable mortgages has lifted to 6.12 per cent across the big banks. CBA has the lowest discounted variable rate at 5.32 per cent, while NAB has the highest at 7.17 per cent.

The banks have also lifted their savings rate between 0.15 per cent and 0.25 per cent.

Article 2.

How much the RBA’s latest rate hike will cost you – and when the pain might end

Mortgage holders are bracing for more hip pocket pain after the Reserve Bank hiked interest rates yet again, adding on average about $120 per month more to repayments.

At its monthly meeting today, the RBA board lifted the official cash rate by 25 basis points to 3.6% – its highest level since June 2012 and the 10th consecutive increase since last May.

“There is some evidence that a wage-price spiral can be avoided and an indication that the December quarter was indeed the peak in inflation,” Ms Creagh said.

How much this rate hike will cost

As has been the case with the previous nine rate hikes, there’s little doubt lenders will pass on today’s increase in full.

As such, a typical borrower is now likely paying about $18,900 more in repayments annually since May.

For those with $500,000 outstanding on their home loan, the February hike could add an additional $80 to their monthly mortgage repayments.

Mortgage holders with a balance of $750,000 will pay an extra $121 a month after today’s increase, while those with a $1 million loan balance will cough up an extra $161 per month.

Mortgage Choice chief executive Anthony Waldron urged all borrowers to check they're not paying more than they should.

“If you haven’t asked your mortgage broker to review your mortgage in the past 12 months, now is a great time to chat to an expert and start your year off on the right foot,” Mr Waldron said.

“I encourage all borrowers to take control of their home loans and be proactive about getting a better deal.”

Housing market impact

Skyrocketing interest rates brought an end to the Covid-induced property price boom, quickly rebalancing the market and seeing values fall from peak levels in most parts of the country, Ms Creagh said.

Although, current conditions are proving advantageous for some, she pointed out.

“Sellers in the market now are benefiting from low competition with other vendors, as buyers vie for available stock.

“The constrained level of properties available for sale has concentrated buyer demand and is putting a floor under home prices to a degree.”

The latest PropTrack Home Price Index shows a modest rise at a national level in February.

“Even as interest rates continue to rise, we’re closer to the peak in interest rate tightening than not and if the RBA hits pause on its tightening cycle, home prices will likely begin to stabilise,” Ms Creagh said.

“The downward pressure from rate rises will also be countered to a degree by positive demand effects that stem from tight rental markets and rental price pressures, rebounding foreign migration, stronger wages growth, and supply issues over the long run.”

What the RBA governor said

In a statement following today’s decision, RBA governor Philip Lowe said he remains “resolute” to do “what is necessary” to cool red-hot inflation.

Mr Lowe acknowledged the financial impact of the board’s aggressive approach to rates, and that the full effect is yet to be felt but said inaction would be worse.

“The board’s priority is to return inflation to target,” he said.

“High inflation makes life difficult for people and damages the functioning of the economy. And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment.

“The board is seeking to return inflation to the 2% to 3% target range while keeping the economy on an even keel, but the path to achieving a soft landing remains a narrow one.”

The annual inflation rate as of December was 7.8%, so there’s still some way to go, Ms Creagh said.

After a strong rebound out of Covid, Australia’s economy remains challenged by high inflation, with rapid rate rises straining household budgets, she said.

“There is already evidence that household spending is slowing as the substantial tightening already pushed through really weighs,” she said.

“But it takes time for higher interest rates to fully impact household cash flows and spending intentions.”