Why there’s ‘no need to panic’ as mortgage rates rise

May 2022Karen Millers

The increase to Australia’s cash rate handed down this week may have been larger and more swift than many first anticipated, but commentators were quick to assure that the May call won’t rock home owners or house prices.

Little change to housing affordability

Real Estate Institute of Australia (REIA) president Hayden Groves said the cash rate increase would have modest impacts on affordability, as banks and mortgage holders have been preparing themselves for this scenario.

“If the cash rate rises to the 2.1 per cent forecast, the proportion of median income required will rise by 6.2 per cent, which most financial institutions would have already stress tested applicants for such rises,” Mr Groves said.

But he cautioned that with many factors impacting Australians’ ability to make mortgage payments, the cash rate call reiterated the urgent need for a national plan that addresses both housing affordability and supply.

“With market economists forecasting a cash rate of at least 2.0 per cent by mid next year, if wages don’t increase it could be a completely different scenario, which will see affordability at its worst in more than a decade,” Mr Groves added.

Chair of the Property Investment Professionals of Australia (PIPA) Nicola McDougall agreed that the May cash rate adjustment was unlikely to impact the vast majority of borrowers.

“It’s important to understand that at 0.35 per cent, the cash rate is still below what was before the pandemic, and well below the 2.0 to 2.5 per cent it was throughout the majority of the Sydney property boom that ended about five years ago,” she said.

Also emphasising that borrowers had been assessed to accommodate interest rate rises of up to 3 per cent, she said there was “no need to panic with most borrowers well-placed to finance moderate increases to mortgage repayments over the next two years”.

Real Estate Industry of Queensland (REIQ) chief executive Antonia Mercorella also stressed that the rate rises were planned for, but she acknowledged that buyer behaviour was likely to adapt to these changing circumstances.

“[Higher mortgage rates] might cause some people to adapt their expectations and start at a more modest level, for example, considering buying an apartment instead of a freestanding house to be able to get their foot comfortably on the property ladder.

“There are some that will be experiencing an interest rate rise for the very first time, and that stands to reason that it might frighten that cohort, particularly when the public were given assurances that the rate wouldn’t go up until 2024,” Ms Mercorella said.

Prices set on current trajectory

Weighing in on house prices, network insiders also commented that the serviceability buffer of 3 per cent meant that the industry was unlikely to see a seismic market shift.

“Whether it is a 0.25 per cent or a 0.40 per cent increase, the lenders currently apply a buffer of 3.0 percentage points to your interest rate when calculating a borrower’s ability to service a home loan,” said Angus Raine, chairman of Raine & Horne,

He, along with the network’s economists, concurred that “homeowners shouldn’t expect the sky to fall in any time soon” as a result of the May interest hikes.

LJ Hooker Group’s head of research Mathew Tiller agreed that “any effect on the property market will be minimal”.

“We are not expecting to see a flood of listings as a result of today’s announcement by the RBA. We have seen strong price growth since the pandemic and for those who acquired a property more than 12 months ago, they have seen an increase in the equity and capital in their homes,” Mr Tiller said.

Meanwhile, Ray White chief economist Nerida Conisbee commented on the multitude of factors that play a part in determining house prices.

“[Interest rates] are not the only influence and in some locations, other factors are a greater consideration. These include the underlying health of the economy, prospects for population growth, urban regeneration and infrastructure improvements, access to finance (ease of lending), increasing wealth, government policy towards property, and the level of household debt,” she said.

“Presently, all these other factors are providing tailwinds for the property market. Employment is very strong and wages are rising, population growth is expected with the return of open borders, and infrastructure spending is at record levels,” she added.

But Ms Consibee didn’t tiptoe around the fact that prices are certainly very sensitive to interest rate rises and that the market was already shifting.

“Although I am 100 per cent sure that all property forecasts published right now won’t be exactly correct, one thing we can be certain about is that the property market is entering a new cycle,” she said.

Tim Lawless, research director at CoreLogic, agreed that factors such as a low unemployment rate and expectations for income growth meant that the market was unlikely to see a substantial rise in distress and forced sales, but he noted the market had already seen price changes off the back of anticipated rises.

“As the cash rate normalises, we can expect housing markets to lose further momentum. A higher cash rate implies higher variable mortgage rates, a reduction in borrowing capacity and tighter serviceability assessments for prospective borrowers,” he said.

He noted that past research from the RBA has pointed to “high-end” housing markets with higher investor concentrations being more sensitive to changes in interest rates in the short term, positing this may be a reason for Sydney and Melbourne’s market declines earlier in the year.

Juliet Helmke, Real Estate Business, 5 May 2022

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