When Will Interest Rates Rise…

Last week the focus on interest rates was intense. After consistently denying that rates could rise any earlier than 2024, the RBA has now left the door open for rate rises as early as later this year and it has many commentators and analysts predicting that this news will impact the housing market.

All of the major banks have now forecast rate rises this year with the only question being which month in 2022 will be first with the expectation being that several more rate rises will quickly follow.

How rate rises affect the property market here will be interesting but the Gold Coast Bulletin ran an article this week discussing levels of mortgage stress and what rate rises could mean. In the article, which is attached below, the postcode of 4226 which includes Robina was named as currently having the highest mortgage stress on the Gold Coast.

Whilst we don't want to be alarmist, it's important that we understand the current factors at play. If you read the newspapers and search the net, property experts as well as buyers and sellers almost universally now believe we are at or very close to the peak of this cycle with price falls predicted and now expected in 2023.

This is why we have seen a significant spike in properties coming to market with sellers wanting to sell

Please see below an article from this week's Australian Financial Review that discusses many of the challenges ahead.

Early rate rise to trigger house price falls this year. 

An early interest rate increase would accelerate the slowdown in the housing market and trigger house price falls by the end of the year, experts say.

While historically, there has been a lag in the impact of interest rate increases on the property market, the effect will be felt earlier this time.

‘‘Our analysis suggests a correlation between the cash rate and housing market is strongest at a 12-month lag, however, that lag could be reduced this time around by the fact that affordability pressures, and a rise in average fixed rates, may start to weigh on demand before a change in the cash rate,’’ said Eliza Owen, CoreLogic’s head of research. ‘‘It is reasonable to expect households would be more sensitive to the cost of debt when household debt levels are elevated, as they currently are.

‘‘The RBA data to September 2021 showed the ratio of housing debt to household income reached a record high of 140.5 per cent. With this in mind, households are likely to be more sensitive to movements in the cost of debt than they have been in the past.’’

Shane Oliver, AMP Capital chief economist, said the higher interest rate may prompt buyers to curtail the level of debt they were prepared to take on, which would limit house price increases.

‘‘The level of household debt is much higher this time around, so this may make people think twice about borrowing large amounts,’’ he said.

‘‘This will act as a dampener on the property market, and through the latter part of this year will result in falling prices, which ultimately contribute to a 5 per cent to 10 per cent fall through next year.’’

Dr Oliver said it would only take a few rises to cool the housing market.

‘‘We’re looking for two hikes this year – one in August, which will take the cash rate to 0.25 per cent, and then another one in September, which we expect to be a 0.25 per cent rise,’’ he said. ‘‘I think that will be enough to start pulling down the market. If we see four more interest rate rises next year, which we expect will take the cash rate to 1.5 per cent, that would result in price drops of up to 10 per cent.’’

The earlier-than-expected rate increases may prompt homeowners to fix their mortgage rate, even at the current higher level, said Peter Munckton, Virgin Money Australia’s chief economist. ‘‘Historically, when there are expectations of interest rate hikes, people rush in to take fixed rate mortgages, so it wouldn’t surprise me if we started to see a bit of pick-up,’’ he said.

‘‘But fixed rates have already gone up because now things are better.’’

Nerida Conisbee, Ray White chief economist, said while some households may feel the pinch of higher interest rates, it was unlikely to lead to widespread mortgage stress.

‘‘Australia has seen a big jump in savings rates over the past two years,’’ she said. ‘‘Although household wealth is now at record highs because of rising house prices, household deposits have also increased significantly.’’