Price falls are set to continue because potential homebuyers’ borrowing capacity will be eroded over time as banks slowly pass on the rate rises to new and existing customers.
RBA governor Philip Lowe will deliver the bank’s decision on rates on Tuesday.AAP
Economists predict the declines will be orderly,and do not expect a mass of distressed sales following the end of a large proportion of fixed-rate mortgages this year.
The Reserve Bank of Australia has lifted rates from their record low of 0.1 per cent,starting in May last year,to 3.1 per cent,rising at the fastest rate since 1994. A further increase is expected on Tuesday and some economists tip it to be the last in the cycle,although others expect a peak cash rate
Rate rises are often passed on to consumers over the course of two to three months for administrative reasons,such as banks increasing their mortgage rates on the last business day of the month.
Potential buyers receive pre-approval for a home loan that may last for about three months,but if they do not buy within that time frame and interest rates go up,their next pre-approval may have a smaller loan size.
A couple earning two average incomes has already lost $306,000 in borrowing capacity since April,.
Borrowing capacity would therefore continue to decrease after the Reserve Bank decided to stop raising interest rates.
Economists agreed the decline in borrowing capacity was the largest contributor to house price falls over 2022 – the once national home values slumped 8.4 per cent from their peak by January – and was forecast to be the largest factor in 2023,as opposed to distressed selling which they hope will remain uncommon.
Property buyers will feel the pinch of rising rates for months to come.Luis Enrique Ascui
Barrenjoey was forecasting a peak-to-trough decline in house prices of 15 per cent;senior economist Johnathan McMenamin said he expected a 30 per cent fall 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,” he said.
“The fall in borrowing capacity of 30 per cent 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.”
However,a disproportionately large portion of fixed-term mortgages constituted a large risk to the property market,CoreLogic head of research Eliza Owen said.
Thirty-six per cent of mortgage debt was on fixed-rate loans,and about 70 per cent of that debt was due 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,” she 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.”
McMenamin said any distressed sales would lengthen 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 was predicting a peak-to-trough decline in prices of 20 per cent;its head of market economics Tapas Strickland said he expected homeowners would prioritise their mortgage,and household spending would decline 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,” he said.
Commonwealth Bank head of Australian economics Gareth Aird said prices should stagnate by the end of the year.
“It will all come down to the Reserve Bank,” he said. “After they stop raising rates there will be a period where[prices] keep falling before they stabilise.”
It would take cutting rates to boost prices again,Aird said,but expected buyers would be a bit more cautious than in previous property booms.
“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,” he said.