Even if home values decrease, rising interest rates would not make housing more accessible in Australia, according to a key credit rating firm.
More interest rate hikes from the Reserve Bank of Australia, according to Moody’s Investors Service, will simply result in borrowers spending more of their salary on mortgage repayments.
Analyst Si Chen predicted that ‘housing affordability will deteriorate as rising interest rates offset dropping home prices.’
‘Homebuyers will need a growing share of their income to fulfill mortgage repayments throughout the rest of 2022,’ says the report.
According to Moody’s, Australian couples needed to set aside 26.8% of their earnings before tax on average for mortgage repayments in May, compared to 25.7 percent in January.
After the RBA raised interest rates by a quarter of a percentage point in May, the proportion of income spent on mortgage servicing increased for the first time since November 2010.
The cash rate increased from 0.1 percent to 0.35 percent, a new low.
The Reserve Bank of Australia boosted interest rates by half a percentage point in June, the largest increase since February 2000.
The cash rate now stands at 0.85 percent, the highest level since October 2019.
The Commonwealth Bank, Australia’s largest home lender, predicts another 0.5 percentage point rate hike by the RBA in July.
Three additional rate hikes were predicted, with increments of 0.25 percentage points in August, September, and November.
The cash rate would rise to 2.1 percent, the highest level since May 2015.
More interest rate hikes, according to Moody’s, will simply make housing less affordable.
‘Home loan interest rates will climb this year in tandem with RBA rate hikes, worsening house affordability,’ it predicted.
House prices in Sydney and Melbourne are expected to decline by 18% by 2023, according to the Commonwealth Bank, as interest rates continue to rise.
Jarden Australia, an investment bank, is predicting a 20% drop, which would be the worst since 1980.
According to Moody’s, even if the RBA’s cash rate climbed to 2.85 percent this year, which no major bank expects, median house prices would have to fall by 22% for affordability to improve.
It anticipated that even if housing prices fell 10%, affordability would worsen since the national average proportion of household income required to pay down a new mortgage would rise to 31%.
‘Based on our analysis of various home price and interest rate scenarios, we do not expect prices to fall to the point where housing affordability improves this year as interest rates rise,’ it said.
In May, a two-income household paid an average of 26.8% of their income on mortgage repayments on a new loan, according to Moody’s.
In Sydney, however, this proportion was 37 percent in a city where the median house price is $1.4 million.
In comparison, monthly mortgage repayments in Melbourne absorbed 29.8% of salary, 23.1 percent in Brisbane and Adelaide, and only 16.3 percent in Perth.
Despite the fact that unemployment remained at a 48-year low of 3.9 percent in May, Moody’s predicted that salaries would not rise to a level that would make homes more accessible.
‘Housing affordability has deteriorated this year as interest rates have risen,’ the report stated.
‘We expect affordability to erode further in the second half of 2022 as the RBA hikes interest rates to battle inflation.’
‘While interest rates rise, property prices will fall and household incomes will rise, but not to the extent that housing affordability improves.’
Inflation increased by 5.1 percent in the year to March, the largest rate since 2001.
However, RBA governor Philip Lowe predicted last week that inflation will approach 7% for the first time since 1990, citing average unleaded gasoline costs of more than $2 per litre.
Despite the worst inflation in decades, Commonwealth Bank chief economist Stephen Halmarick believes the RBA will start cutting rates again in 2023.
‘House prices are a little lower once the Reserve Bank gets on top of inflation,’ he said on ABC Radio National on Monday.
‘We believe they will be decreasing interest rates again by the end of 2023, which will benefit property values into 2024.’
Property prices, according to Mr. Halmarick, tend to change over a seven-to-ten-year period.
‘If you look at a long-term trend of housing prices, they continue to climb over time,’ he remarked.
According to CoreLogic data, auction clearing rates have dropped to just 55.4 percent in Sydney over the weekend, compared to 76.8% this time last year.
Despite CoreLogic data showing higher decreases in affluent regions of Sydney and Melbourne, Michael Yardney, the founder of buyers’ firm Metropole Property Strategists, said property prices were more likely to fall in poorer, outer suburbs.
‘While the outer suburban and more inexpensive end of the markets have performed well so far, affordability is now becoming a problem because locals have had no income growth during the period when property values have risen,’ he added.
‘The citizens in these areas don’t have enough money in their paychecks to pay the increased rates that the properties are now fetching.’