Average mortgage rates have more than doubled since the Reserve Bank began its rate hike cycle last May, but not everyone is affected in the same way.
At this time last year, mortgage holders were charging about 2.9% interest. This has now increased to 5.9%. – can be even higher.
Some Australians have been hit much harder than others.
About two-thirds of Australian households own a home. Of these, just under half do not have a mortgage. Property prices have fallen over the past year, but remain significantly higher than pre-pandemic levels in most markets.
As such, a significant portion of homeowners have made significant property returns over the last few years without increasing their mortgage payment burden.
Across Australia, the average loan amount in January 2023 was $601,000, up from $504,000 just three years ago. This means that recent homeowners are likely to have more difficulty, as interest rates have a greater relative impact on larger loans.
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Interest rate spikes affect some Australians more than others.Photo: Getty
However, the average loan amount also varies from country to country. New South Wales and Victoria are the most expensive states to buy a home, with average loan amounts reaching $803,000 and $651,000 respectively in January 2022.
In contrast, in South Australia, Western Australia, Tasmania and the Northern Territory, the average loan amount has never exceeded $500,000.
Again, this means that the relative impact of rising interest rates varies across the country, explaining the larger price declines seen in more expensive states.
High interest rates hinder the development of new housing
Australia’s population is growing again, and with it comes a need for more homes. Unfortunately, development activity is starting to slow down.
Rising interest rates have slowed development activity.Photo: Getty Images
The total number of approved housing units has been on a two-year downward trend, hitting the lowest level seen in more than a decade in January, with housing starts falling as well.
Rising building input prices, labor and material shortages, and construction schedules all contribute to the cost explosion.
Interest rates now act as a further impediment by increasing the cost of financing new development.
Real estate prices could fall further
The impact of the 10 consecutive rate hikes seen so far has been to cut the average buyer’s ability to borrow by about 30%. If the buyer can borrow less money, the total amount available will decrease and the price will drop.
House prices fell 3.9% from their peak across the country, with the biggest declines in Sydney, down 7%, and Melbourne, down 6%.
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The pace of price declines has slowed, with prices rising slightly in February, but this decline in borrowing capacity will continue to impact how much buyers are able to pay.
However, interest rates are not the only factor driving property prices in Australia.
So far, the low level of properties for sale has moderated the level of price declines, effectively reducing supply.
Similarly, slowing development activity combined with accelerating population growth may set a floor on how far prices can fall over the next few years.
Affordable regions continue to outperform
So far, borrowing capacity has declined far more than price declines, driving some buyers out of certain areas.
This has drawn more buyers to affordable suburbs and neighborhoods, supporting demand and prices in these areas.
In many of the more affordable suburbs, prices have stabilized and even increased in some cases, in contrast to the declines seen across the market. A trend that is likely to continue.