Even if house values fall, rising interest rates would not make housing more affordable in Australia, according to a major rating company.
Further interest rate hikes from the Reserve Bank of Australia, according to Moody’s Investors Service, will simply result in borrowers spending more of their wages on mortgage payments.
Analyst Si Chen predicted that “housing affordability will deteriorate as rising interest rates offset falling house prices.”
“Homebuyers will need an increasing share of their income to pay off their mortgages throughout 2022,” the report said.
According to Moody’s, Australian couples were expected to set aside 26.8% of their pre-tax income on average for mortgage repayments in May, up from 25.7% in January.
After the RBA raised interest rates by a quarter of a percentage point in May, the proportion of income spent on servicing mortgages rose for the first time since November 2010.
The cash rate fell from 0.1% to 0.35%, a new low.
The Reserve Bank of Australia raised interest rates by half a percentage point in June, the biggest increase since February 2000.
The cash rate now stands at 0.85%, the highest level since October 2019.
Commonwealth Bank, Australia’s largest property lender, is forecasting another 0.5 percentage point rate hike by the RBA in July.
Three more rate hikes were scheduled, with increases of 0.25 percentage points in August, September and November.
The cash rate would rise to 2.1%, the highest level since May 2015.
Further interest rate hikes, according to Moody’s, will simply make housing less affordable.
“Home loan interest rates will climb this year alongside RBA rate hikes, which will deteriorate housing affordability,” he predicted.
House prices in Sydney and Melbourne are expected to fall by 18% by 2023, according to the Commonwealth Bank, as interest rates continue to rise.
Jarden Australia, an investment bank, predicts a 20% decline, which would be the worst since 1980.
According to Moody’s, even if the RBA’s cash rate climbs to 2.85% this year, which no major bank expects, median property prices would need to fall 22% for affordability to improve. improved.
It predicted that even if house prices fell by 10%, affordability would deteriorate as the national average proportion of household income needed to pay off a new mortgage would rise to 31%.
“Based on our analysis of various home price and interest rate scenarios, we do not expect prices to fall to the point where housing affordability improves this year as rates rise. interest increases,” he said.
In May, a two-income household paid an average of 26.8% of their income in mortgage payments on a new loan, according to Moody’s.
In Sydney, however, that proportion was 37% in a city where the median house price is $1.4 million.
By comparison, monthly mortgage payments in Melbourne took up 29.8% of salary, 23.1% in Brisbane and Adelaide and just 16.3% in Perth.
Despite unemployment remaining at a 48-year low of 3.9% in May, Moody’s predicted wages would not rise to a level that would make homes more affordable.
“Housing affordability has deteriorated this year as interest rates have risen,” the report said.
“We expect affordability to erode further in the second half of 2022 as the RBA raises interest rates to fight inflation.”
“As interest rates rise, house prices will fall and household incomes will rise, but not to the extent that housing affordability improves.”
Inflation rose 5.1% in the year to March, the highest rate since 2001.
However, RBA Governor Philip Lowe last week predicted inflation would approach 7% for the first time since 1990, citing the average cost of unleaded petrol of more than $2 a litre.
Despite the worst inflation in decades, Commonwealth Bank chief economist Stephen Halmarick believes the RBA will start cutting rates again in 2023.
“House prices are a little lower once the Reserve Bank gets inflation under control,” he said Monday on ABC Radio National.
“We think they will cut interest rates again by the end of 2023, which will benefit property values through 2024.”
Real estate prices, according to Mr. Halmarick, tend to change over a period of seven to ten years.
“If you look at a long-term trend in house prices, they continue to go up over time,” he noted.
According to data from CoreLogic, auction clearing rates fell to just 55.4% in Sydney over the weekend, from 76.8% at the same time last year.
Although data from CoreLogic shows bigger falls in affluent areas of Sydney and Melbourne, Michael Yardney, the founder of buyers’ firm Metropole Property Strategists, said property prices were more likely to fall in the poorest suburbs.
“While the outer suburbs and lower-priced markets have performed well so far, affordability is now becoming an issue as residents have not experienced income growth during the period when property values have increased” , he added.
“Citizens in these areas don’t have enough money on their paychecks to pay the increased rates properties are now recouping.”