Australian house values are expected to fall by 25%, according to a leading economist, as borrowers deal with the fastest rate increases in nearly three decades.
The experts generally anticipate that the Reserve Bank of Australia will continue raising the cash rate in 2022 and potentially into 2023 as a result of inflation spiking at its quickest rate in 32 years.
Jo Masters, the head economist at Barrenjoey, anticipates a 25% decline in the median price of homes in Sydney as a result of the RBA’s harsh tightening of monetary policy, which has precipitated a recession.
In Sydney on Monday, she spoke at The Australian Financial Review Property Summit and said, “Our modeling implies that if the Reserve Bank follows market pricing, we would have an economy in recession and we will have house prices down considerably.”
The most interest-rate sensitive market in Australia is Sydney, where the mid-point home price has dropped 7.3% since the year’s beginning to $1.3 million as of August, according to CoreLogic statistics.
Sydney’s median house price was $1.41 million in February, before prices started to fall. As a result, a 25% reduction from the top would subtract $352,532 from the price of a typical suburban property, bringing it back down to $1.058 million.
Based on the sharpest rate of rises since 1994, Ms. Masters predicted that the cash rate would grow by another 0.5 percentage points to a nine-year high of 2.85 percent, up from its current level of 2.35 percent.
She said that this would especially hurt Sydney’s “highly leveraged” housing market, where the median home price is 11.3 times the average annual full-time earnings of $92,000, even with a 20% down payment on a mortgage.
Having a debt-to-income ratio of six or more is seen as dangerous by the banking regulation.
The Reserve Bank’s head of domestic markets, Jonathan Kearns, predicted at the AFR summit that a two percentage point hike in RBA interest rates would result in a 15% decrease in house values.
He pointed out that if the cash rate increased by 200 basis points over two years, as predicted in the RBA’s April Financial Stability Review report, prices would decline at this rate.
According to Dr. Kearns, “While this 15% fall was frequently cited as a forecast for house prices, it was not exactly a prediction of how much housing prices would change.”
Instead, assuming that all other costs and advantages of home remain constant, it was an estimate of how sensitive housing prices are to interest rates.
The Reserve Bank has tightened monetary policy to the greatest extent since 1994, raising interest rates by 2.25 percentage points since May, bringing the cash rate to a seven-year high of 2.35 percent.
Dr. Kearns claimed that the five straight rate increases since May, which put an end to the record-low 0.1 percent cash rate, had had a greater impact on the slowing of the real estate market than the stronger banking regulator regulations that went into force in late 2017.
According to him, the maximum loan amount has been affected by the cash rate hike of 225 basis points since May considerably more so than by the APRA requirement.
Since the cash rate increased by 225 basis points and was fully reflected in mortgage interest rates, the maximum loan size for borrowers was reduced by about 20%.
Overall, we know that rising interest rates will typically lead to a decline in residential and commercial property values, but the degree and even the timing of this decline are very unclear.
The largest mortgage lender in Australia, The Commonwealth Bank, provided fresh figures on Monday indicating a 13% fall in new mortgage lending in August compared to a year earlier.
Since November, instead of the previous 2.5 percentage points, the Australian Prudential Regulation Authority has mandated that borrowers simulate their capacity to handle a three percentage point increase in variable mortgage rates.
Inflation rose by 6.1% in the year to June, far beyond the RBA’s goal range of 2 to 3%.
Both the Reserve Bank and the Treasury anticipate that in 2022, headline inflation would reach 7.75 percent, the highest level since 1990.
The first technical recession since 1991 was caused by Covid lockdowns in March 2020, which prompted the RBA to lower the cash rate to a record-low 0.1% in November 2020.