Australia’s housing market is facing its biggest decline in more than 40 years, with values already down by 5.9% since April across the five major capitals.
Tuesday’s 25 bp rate hike by the Reserve Bank of Australia (RBA) took the official cash rate to a 15-year high of 4.60% and will add around $120 per month to repayments on the average new mortgage of $731,000:
Cotality estimates that “the cumulative impact of rate rises since February has reduced borrowing capacity by almost $90,000”, which is “equivalent to around a 9% decline in purchasing power”.
As a result, “higher interest rates are expected to keep housing demand and transaction activity subdued through weaker affordability and reduced borrowing power”.
Financial markets are tipping that the RBA will hike one to two more times, which could see the cash rate climb to 5.10%—its highest level since late 2008 during the Global Financial Crisis. Were this to come to fruition, interest rates on new owner-occupier mortgages would climb to nearly 7%:
Cotality warns that “should the RBA follow today’s move with another increase in November, housing conditions would likely weaken through an additional reduction in borrowing capacity, as well as a further deterioration in home loan serviceability and sentiment”.
“Housing turnover is likely to remain below average as both buyers and sellers adjust to a prolonged period of elevated borrowing costs”.
AMP chief economist Shane Oliver is more blunt, warning that additional rate hikes could trigger a ‘tipping point’ for house prices, causing a peak-to-trough decline of 15% to 20%:
Another hike to 5.1% “is going to cause major problems for households with mortgages”, Oliver said, noting that debt burdens have become substantially larger over the past two decades.
“And it would be devastating for the property market. The higher you go [with the cash rate], the greater the chance you hit a tipping point, and instead of a 10% decline in home prices, you get more like a 15-20% drop”, he said.
HSBC chief economist Paul Bloxham has already forecast a 13% peak-to-trough decline in capital city home values.
However, even HSBC’s forecast may prove to be optimistic if the RBA delivers further rate hikes.
The doomsday scenario would arise if Australia experienced a sharp rise in unemployment, alongside a material increase in mortgage defaults.
Then Australia’s housing correction could turn into a New Zealand and Canada-style “crash”, with values falling by around 20% in nominal terms and 30% in real inflation-adjusted terms.
