Property prices are expected to keep declining for months even after the Reserve Bank pulls the break on interest rate hikes, economists have warned.
Property values will continue to fall as banks slowly pass on the rate hikes to new and existing customers, eroding their borrowing capacity over time.
Economists predict the declines to be orderly, while the end of a large proportion of fixed-rate mortgages this year is not expected to result in a wave of distressed sales, WAtoday reported.
Rates were at a record low of 0.1% in May last year when the Reserve Bank started lifting rates at the fastest pace since 1994. Following eight consecutive hikes, the cash rate now sits at 3.1%. Another rate hike is expected today, with some economists tipping it to be the last in the cycle, while others are predicting a peak cash rate as high as 4.1%.
Banks often pass the rate hikes to consumers over two to three months for administrative reasons.
A pre-approval for a home loan may last for about three months, and when potential buyers do not buy within that time frame and interest rates increase, their next pre-approval may have a smaller loan size.
A recent Canstar analysis showed that a couple with two average incomes has already lost $306,000 in borrowing capacity since April.
Borrowing capacity would therefore continue to shrink after the RBA decided to stop lifting interest rates.
The decline in borrowing capacity was identified by economists as the largest contributor to house price falls over 2022 – the deepest on record once national home values plunged 8.4% from their peak in January – and is expected to be the largest factor in 2023, as opposed to distressed selling, WAtoday reported.
Barrenjoey was predicting a peak-to-trough decline in house prices of 15%, with Johnathan McMenamin, senior economist, saying he is expecting a 30% drop in borrowing capacity.
“While rates will stay at a high level, the actual prices in the housing market will take some time to catch up to the fundamental value,” McMenamin said. “The fall in borrowing capacity of 30% will weigh on the property market during 2023. The effect of the roll-over will change the speed of the adjustment. But the level we think house prices will go to will be mostly based on borrowing capacity.”
Eliza Owen, CoreLogic head of research, noted, however, that a disproportionately large portion of fixed-term mortgages constituted a large risk to the property market.
Thirty-six per cent of mortgage debt was on fixed-rate loans, while around 70% of that debt was set to roll onto variable loans this year.
“For those on fixed terms, it’s going to be a more intense sticker shock and so it could see an increase in distressed sales,” Owen said. “But I think it’s really uncertain how risky that fixed rate cliff is. The official guidelines for whether or not you’re able to repay a loan is three percentage points above the product rate and the Reserve Bank rates have already risen that much.”
Any distressed sales, McMenamin said, would prolong the market cycle, but not increase price falls.
“What we might see is people try to hold back from selling their homes as long as possible and that will make the cycle more drawn out,” he said. “As people have to sell, we might see the rate of decline pick up again.”
NAB is forecasting a 20% peak-to-trough decline in prices, with Tapas Strickland, head of market economics, expecting homeowners to prioritise their mortgage, and for household spending to drop instead of a significant number of distressed sales taking place.
“While you may not get distressed sales, you will see a sharp decline in household consumption,” Strickland said.
Gareth Aird, Commonwealth Bank head of Australian economics, expected prices to stagnate by the end of the year.
“It will all come down to the Reserve Bank,” Aird said. “After they stop raising rates there will be a period where [prices] keep falling before they stabilise.”
Aird said rates needed to be slashed to boost prices again but expected buyers to be a bit more cautious than in previous property booms, WAtoday reported.
“Even if they say they don’t think they’ll be raising rates any more for a while, people will know that could change based on what they said last year and what ended up happening,” Aird said.
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