Why rising interest rates WON’T make housing more affordable in Australia
Rising interest rates won’t make housing in Australia more affordable, even if property values fall, a leading credit rating agency says.
Moody’s Investors Service said more interest rate hikes from the Reserve Bank of Australia would lead borrowers to spend more of their wages on paying off mortgages.
“Residential affordability will deteriorate as rising interest rates outweigh falling house prices,” analyst Si Chen said.
“For the rest of 2022, home buyers will need an increasing share of their income to meet their mortgage payments.”
In May, Australian couples had to set aside an average of 26.8 percent of their pre-tax wages for mortgage payments, compared to 25.7 percent in January, Moody’s calculated.
Moody’s Investors Service said more interest rate hikes from the Reserve Bank of Australia would lead borrowers to spend more of their wages on mortgage payments (pictured is auctioneer Karen Harvey in Sydney)
New Commonwealth Bank Forecasts on RBA Cash Rate
JULY: 0.5 percentage point up to 1.35 percent
AUGUST: 0.25 percentage point up to 1.6 percent
SEPTEMBER: 0.25 percentage point up to 1.85 percent
NOVEMBER: 0.25 percentage point up to 2.1 percent
The portion of income spent on paying off a mortgage rose after the RBA raised interest rates by a quarter of a percentage point in May — the first increase since November 2010.
The cash interest rate rose from a record low of 0.1 percent to 0.35 percent.
The RBA raised interest rates again by half a percentage point in June — the largest increase since February 2000.
This brought the cash interest rate to 0.85 percent, the highest since October 2019.
The Commonwealth Bank, Australia’s largest mortgage lender, expects the RBA to raise interest rates by another 0.5 percentage point in July.
Three more rate hikes were expected, with 0.25 percentage point increases tipped for August, September and November.
This would bring the cash interest rate to 2.1 percent – the highest since May 2015.
Moody’s said more rate hikes would simply make housing less viable.
“Housing loan interest rates will continue to rise this year, along with RBA rate hikes, which will worsen housing affordability,” the report said.
In May, Australian couples had to set aside an average of 26.8 percent of their pre-tax wages for mortgage payments, compared to 25.7 percent in January, Moody’s calculated (photos of houses under construction in Oran Park in Sydney’s far south-west)
The Commonwealth Bank expects house prices in Sydney and Melbourne to fall by 18 percent by 2023 as interest rates continue to rise.
Investment bank Jarden Australia expects an even bigger 20 percent drop, the worst since 1980.
Moody’s said that even if RBA rates rose to 2.85 percent this year — a situation no major bank predicts — median home prices would need to fall 22 percent to improve affordability.
It predicted that a 10 percent drop in home prices would still worsen affordability, as the national average share of household income needed to pay off a new mortgage rose to 31 percent.
“Based on our assessment of various housing price and interest rate scenarios, we do not expect prices to fall to the extent that housing affordability improves as interest rates rise this year,” the report said.
Moody’s calculated that a two-earner household spent an average of 26.8 percent of their income in May paying off mortgages on a new loan.
But in Sydney, the figure was 37 percent in a city where $1.4 million is the median home price.
By comparison, monthly mortgage payments consumed 29.8 percent of wages in Melbourne, 23.1 percent in Brisbane and Adelaide and just 16.3 percent in Perth.
Despite the worst inflation spike in decades, Commonwealth Bank chief economist Stephen Halmarick said the RBA could start cutting interest rates again in 2023 (pictured is a branch in Melbourne)
How many mortgage payments eat off wages?
AUSTRALIA: 26.8 percent
SYDNEY: 37 percent
MELBOURNE: 29.8 percent
BRISBANE: 23.1 percent
ADELAIDE: 23.1 percent
PERTH: 16.3 percent
Source: Moody’s Investors Service average calculations for dual earners paying off their mortgage in May 2022
Despite the unemployment rate remaining at a 48-year low of 3.9 percent in May, Moody’s said wages are unlikely to rise to levels that would make housing more affordable.
Home affordability has deteriorated this year as interest rates have risen.
In the remainder of 2022, we expect affordability to deteriorate further as the RBA raises interest rates further to curb inflation.
“House prices will fall and household incomes will rise, but not to the extent that they improve housing affordability while interest rates rise.”
In the period to March, inflation rose 5.1 percent, the fastest rate since 2001.
But RBA Governor Philip Lowe last week predicted inflation would hit 7 percent for the first time since 1990, with an average price of unleaded gasoline above $2 a liter.
Despite the worst inflation spike in decades, Commonwealth Bank chief economist Stephen Halmarick said the RBA could start cutting interest rates again in 2023.
“After interest rates rise, the Reserve Bank will come on top of inflation, house prices will be a bit lower,” he told ABC Radio National on Monday.
Moody’s calculated that a two-earner household spent an average of 26.8 percent of their income in May paying off mortgages on a new loan. But in Sydney, the figure was 37 percent, compared to 29.8 percent in Melbourne, 23.1 percent in Brisbane and Adelaide and just 16.3 percent in Perth.
“We think they can cut interest rates again at the end of 2023, which is good for house prices until 2024.”
Mr Halmarick said property prices tend to fluctuate over a seven to ten year period.
“If you look at a very long-term chart of house prices, they continue to rise over time,” he said.
Auction clearance rates dropped to just 55.4 percent in Sydney over the weekend, compared to 76.8 percent this time around last year, CoreLogic data shows.
Michael Yardney, the founder of buyers’ agent Metropole Property Strategists, said home prices were more likely to fall in poorer suburbs, despite CoreLogic data showing larger declines so far in wealthier suburbs of Sydney and Melbourne.
“While the suburbs and the more affordable part of the markets have performed strongly so far, affordability is now becoming an issue as locals have experienced minimal wage growth during the time when real estate prices were booming,” he said.
‘At these locations, the residents no longer have money in their salary package to pay the higher prices that the homes now achieve.’