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With the Reserve Bank of Australia hiking the official cash rate to 0.35 per cent, we analyse what it means for house prices.

Will higher rates mean lower property values?

Most likely.

While the official rate rise for May is a 0.25 percentage point increase, RBA Governor Phil Lowe also confirmed further rises are ahead.

The RBA has also already canvassed this in its most recent Financial Stability Report.

In that report it noted that a 2 percentage point rise in interest rates could see property values drop by 15 per cent.

It’s important to put this into context though – property prices across Australia have increased by more than 25 per cent since the beginning of the pandemic, and in some regional areas the increases have been more than double that.

CoreLogic’s research director Tim Lawless said that under the RBA’s 15 per cent decline scenario, based on where national housing values were at the end of March this year, the predicted decline would take housing values back to levels similar to what they were in March 2021 – meaning they’d still be much higher than they were pre-pandemic.

Ray White chief economist Nerida Consibee said that high inflation rates – and the rise in interest rates that follow – meant slower growth rates were a sure thing for the rest of 2022 for the Australian market as a whole.

Already, speculation of rising rates may have been having an impact on larger housing markets.

“Finance becoming more expensive through higher interest rates will slow the market overall. We can see this already. House price growth over the past three months across Australia has been lower than the final quarter of 2021 – interest rates haven’t increased yet but there has been greater commentary that they will sooner rather than later,” she said.

But rate rises are “just one influence on house prices”, Ms Conisbee said.

“Other factors that influence include population growth, urban regeneration, access to finance (ease of lending), increasing wealth, the level of debt that people hold, sentiment towards property and localised economic growth,” she added.

How low will prices go once rates begin to rise?

Some of this depends on just how much rates rise by – and there’s not yet a consensus on this among the major banks. For example, predictions among the major banks range from CBA tipping increases will top out at 1.25 per cent to ANZ predicting that they’ll rise above 3 per cent at some point beyond 2023.

“On one hand you’ve got CBA predicting a neutral cash rate of 1.25 per cent, Westpac believes it’ll get to 2 per cent, while the markets are predicting it will get to 3.4 per cent by August next year,” Sally Tindall, RateCity’s research director, said.

Ms Tindall said that the record high level of debt taken on by Australian borrowers may convince the RBA to err on the low side of these predictions.

But other factors, like high levels of employment and increasing levels of inbound migration, meant that there would still be demand for properties regardless of rate increases, according to CoreLogic’s head of research, Eliza Owen, potentially softening the blow of any downturn.

Historically, the extent of housing market downturns in Australia had varied significantly, she said.

“Since the late 1980s, Australia has experienced national downturns that have ranged in severity from a 1 per cent peak to trough decline in 2015-16, a temporary correction following the first round of credit tightening via APRA’s 10 per cent speed limit on investment lending, to an 8.4 per cent drop in national values between late 2017 and mid-2019,” she said.

Should we be expecting an increase in people defaulting on their mortgage?

It’s unlikely that we’ll see a large increase in what the property industry and banks calls ‘distressed listings’ – a term describing the sale of a property that has been repossessed by a lender because a mortgage holder can’t keep up with increased repayments. The glut of listings in the United States real estate market during and after the Global Financial Crisis is a prime example of what distressed listings look like.

There were a few key reasons for this, according to CoreLogic’s research director Tim Lawless.

The first was that many households were already ahead on their repayments, in part due to the forced saving during the months of lockdowns and closed borders that were a hallmark of the pandemic.

“The RBA has recently noted in their latest financial stability review the median repayment buffer for owner occupiers with a variable mortgage rate had grown to 21 months of scheduled repayments in February 2022, up from 10 months at the start of the pandemic,” Mr Lawless said.

“With a two-percentage point rise in interest rates, the median repayment buffer would reduce back to 19 months, which is still substantial. With the median household well ahead of their mortgage repayments, the risk of households falling behind on their mortgage repayments is reduced.”

The other factor staving off an uptick in distressed listings was that many households had opted to fix their mortgage repayments in recent years.

While most borrowers have traditionally opted for variable mortgages, fixed rate borrowing accounted for as much as 45 per cent of borrowing activity during 2021.

This meant that many households would be insulated from any immediate increase in rates, although they could be in for a shock when it came time to refinance, Mr Lawless said.

However, increasingly strict serviceability tests for borrowers meant most new borrowers would have already had to prove to their bank that they could handles repayments at mortgage rates 3 per cent higher than their current rate.

Data from the Australia Prudential Regulatory Authority, the government body that imposes such requirements on banks, also indicated that the portion of outstanding loans that were between 30 to 89 days past their due date was 0.4 per cent – half of what it was in March 2020, at the start of the pandemic.

“Such low numbers imply borrowers are entering a period of rising interest rates from a relatively strong foundation,” Mr Lawless said.



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