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Will House Prices Fall When Interest Rates Begin To Rise?

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Mortgage rates should rise slowly next year, and it is highly likely that the official discount rate will rise in 2022 as well.

The next move from the Reserve Bank is to raise interest rates, but it may not be as fast as many expect. Therefore, the impact on the housing market is unlikely to be as dramatic as some people are aware of.

What is the annual pace of rising house prices? Buyer demand is expected to continue to slow as mortgage rates bottom out, damaging affordability and already high home prices.

As vendors become more motivated to list properties, they have more choices and improve the imbalance between supply and demand for properties for sale. In addition to the benefits that lower mortgage rates have turned into higher home prices, this should help mitigate price increases this year.

However, while we don’t expect house prices to fall, there are a few other things that can happen when interest rates rise.

1. Mortgage rates rise regardless of RBA

Even if the RBA keeps its cash rate at a record low of 0.10% until early 2023, mortgage rates will rise.

Fixed rates have already risen from record lows and have risen in recent months since the RBA’s term funding facility expired, but floating rates are significantly higher as lenders remain competitive. It has dropped to.

This means that new borrowers have not necessarily seen budget cuts.

However, bank funding costs are rising and floating rates could rise later this year. Especially if the RBA raised its cash rate this year.

Rising mortgage rates will limit the amount that new borrowers can achieve, and existing borrowers will see higher repayments. Already high home prices, along with mortgage bottoming out, will delay annual price increases.

2. Mortgage rates remain low by historical standards

Housing repayment costs are expected to rise over the next year, but remain at historically low levels.

As the RBA raises interest rates, mortgage rates will continue to rise.

Borrowers may increase their repayments sooner than previously expected, but the RBA may slowly raise interest rates while ending emergency policymaking. This means that mortgage service costs are likely to be close to or below the average levels seen over the last 20 years.

3. Households are facing a once-in-a-generation savings boom

“Household savings” is equivalent to the ratio of household income saved over a period of time to net household disposable income.

The household savings rate for the September 2021 quarter rose from 11.8% in the June quarter to 19.8%. This is partly due to the blockades in Sydney and Melbourne, which have reduced the means for households to spend money.

In addition, government subsidies, tax exemptions, and dividend payments increase income while lowering household spending, providing a significant cushion for households to rely on.

4. The value of assets and household assets has skyrocketed

“Household wealth” refers to total household wealth (housing, aging, holding financial assets, cash and time deposits) and durable assets such as automobiles and furniture.

In recent years, the value of Australian homes (and the wealth of homeowners) has skyrocketed, and so has the value of financial assets such as stocks.

Total Australian housing stock reached a record $ 9.26 trillion in the September 2021 quarter, according to Australian Bureau of Statistics data.

According to other ABS data, total household wealth increased by $ 590 billion, or 4.4%, to a record $ 13.92 trillion in the September 2021 quarter. This is an increase of 20.2% compared to a year ago, the largest annual increase in more than 10 years.

The rise in the value of assets to debt has historically placed a strong position on the household balance sheet.

5. High interest from buyers and relatively small inventories available for sale

All of these factors contribute to less impact on the housing market than some people are aware of. However, in addition to that, relatively small inventories available for sale and still strong demand for buyers are set to support the housing market.

The recent increase in new listings has cooled some of the extreme competition and gave buyers more choice, but since February 2020, the total number of properties for sale has dropped by 35%. ..

Further subdivided, the number of views per list at realestate.com.au reached a record high in January 2022. This represents a continuous disruption between supply and demand for real estate for sale, and continues to create upward pressure on prices, especially in the region. If the available supply of real estate for sale remains very limited (Brisbane, Adelaide, Rural).

According to data from realestate.com.au, Australians are more engrossed in real estate than ever before.Photo: Getty


6. Investors, equity gains and trading volumes

Following the recent rise in home prices, many homeowners today are accumulating significant equity gains.

The experience of telecommuting arrangements and blockades has changed housing preferences and reassessed both the type and location of housing.

The combination of these two factors should support the 2022 trading volume. In addition, improved economic certainty will give trading opportunities to what was suppressed during last year’s blockade.

Continued capital growth and attractive rental yields are evoking investor activity as the combination of less uncertainties in the economy eases the combination of borrowing costs.

According to ABS, demand for investor mortgages has risen from a record low of about 20% for new lending to more than 30%.

In addition, as borders reopen and skilled migrant workers and international students return, investors may take further action due to new demand for rent in the city center and rising rent price pressure.

Investor inquiries on realestate.com.au increased steadily until 2021 and are now up 30.4% year-on-year, with the percentage of investor inquiries at the highest level recorded in more than three years. It is moving to the center.

In fact, rents have skyrocketed in recent years due to lack of investor activity, and it will be important to increase investor purchases to ease rent pressure.

Reserve Bank of Australia

RBA raises interest rates-it’s a matter of when.Photo: Getty


7. Inflation is high, but RBA is also waiting for wage growth

The RBA has repeatedly “patience” with interest rate hikes and inflation.

Obviously, the board is waiting for wages to approach 4%.

Cash rates are unlikely to rise until empirical evidence is obtained that wage growth is significantly higher than it is today. Wages need to grow in stronger clips for inflation to be sustainable.

To date, both the labor market and inflation have strengthened faster than expected. This is likely to continue, increasing the likelihood that cash rates will rise in 2022, but for this year’s cash rates to rise, wages need to be raised extensively, not just in industries where wages have risen. there is. The result of a pandemic.

By industry, the biggest wage increases in the September quarter of last year were construction and professional, scientific and technical services. The construction sector has been driven by stimulus and low borrowing costs, but the closeness of professional services can be impacted by border closures.

8. If the RBA raises interest rates, wages will rise and the economy will strengthen.

The economy has recovered more than expected through the pandemic. The unemployment rate is above pre-COVID levels and has now dropped to 4.2% from its peak in July 2020. This is the lowest level in 13 years, well below the unemployment rate of 5% or more before COVID-19.

In fact, the strength of the labor market recovery is so strong that the RBA had to make adjustments to consistently lower unemployment forecasts.

The RBA is waiting for a sustained rise in wage growth before raising the cash rate so that it can confirm that inflation is consistently within the target range. This means that by the time interest rates rise, rising wage growth will buffer the rise in mortgage rates.

It is unlikely that the RBA will raise interest rates rapidly so far, the economy will recede and the housing market will plummet. And central banks are aware of the implications of making this mistake, especially when it comes to housing, and the impact of falling home prices will affect broader spending across the economy.

If interest rates rise too fast, it will drive a sustained weakness in the economy and housing markets. As a result, fewer people get jobs, wage growth slows, and overall economic activity declines. This is an undesired result for the RBA and its full employment goals.

The bottom line is that rising interest rates will strengthen the economy.

The buffer accumulated by households will continue to support the economy, and although the rise in house prices will slow down this year, it is unlikely that the price will fall in 2022, and the subsequent decline is expected to moderate.

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