Mortgage rates have fallen to below 2% in recent years, but like in many countries, interest rates are rising rapidly in Australia as the central bank looks to tame inflation, which is at a record high of 6.8% in the 12 months to August.
The Reserve Bank of Australia has hiked interest rates for five straight months raising the official cash rate to 2.35% from just 0.1% in April in an effort to rid the “scourge” of inflation, according to Governor Philip Lowe. Banks have passed on the increased borrowing costs through higher loan rates, which are now hovering between 4% and 5% and are on track to rise further.
But while overall spending may be trimmed, thus cooling inflation, the Australian housing sector now enters a new state of flux where buyers are reluctant to buy due to high-interest rates on loans, or they’re waiting for prices to fall further. And sellers are not sure if they want to sell at a cheaper price.
In other words, the Australian housing market is in the midst of a standoff trying to adjust to a new normal. With Australia’s house prices — among the highest in the world — falling, the conditions in Australia will offer insight for economic watchers globally as interest rates continue to rise.
According to the latest Demographia international housing affordability report for 2022, Sydney ranked second after Hong Kong as the least affordable city globally. Melbourne is in the fifth position.
National house prices have fallen for a fourth straight month as demand for homes starts to slide due to higher costs of borrowing. The monthly price fall in August was also the largest since 1983. Every capital city apart from Darwin is now in a housing downturn, with a similar scenario playing out across the rest-of-state regions, where only regional South Australia recorded an increase in housing values for the month. House buyers gather outside the auction of a renovated terrace in Sydney's Newtown in September.
Capital Economics’ Australian Economist Marcel Thieliant said that “Rapidly worsening affordability due to soaring mortgage rates will result in prices across the eight capital cities falling by at least another 10%.” In Sydney, Australia’s biggest city, home prices have fallen over 7% since prices started unwinding at the start of the year, just before interest rates lifted.
But the declines come after a massive price surge of nearly 30% in the post-Covid recovery that kicked off toward the end of 2020, driven by stimulus-driven programs to boost spending and supported by low-interest rates.
The same pattern can be seen in Melbourne, the country’s second biggest city. Since hitting peak prices earlier this year, house prices in Melbourne have fallen nearly 5%. The current clearance rates at auctions in both cities have also closed lower at between 50% and 60% in recent weeks, despite the arrival of the spring season, the most buoyant trading period for the industry.
Auctions are the most popular way to sell homes in Sydney, Melbourne, and many parts of Australia and are key indicators of market sentiment in the property market. This means that just over half of the properties taken to auctions were sold. While still higher than clearances of 30% to 40% during the height of the pandemic, they were lower than during the boom years of 2013 to 2017, when clearance rates were consistently at around 70% to 80%.
Other indicators also point to the softness in the Australian housing market, particularly in major cities. The national industry association for residential Buildings in Australia, the Housing Industry Association, warned that home construction has slowed. The fastest increase in the cash rate in almost 30 years will bring this building boom to an end.
There are clear signs that the rising cost of construction, a drop in consumer confidence, and falling established house prices have seen a slowdown in demand for new homes from the record levels of 2020/21. “The reduced borrowing capacity due to rate rises definitely put some buyers off the market. It’s probably a transitionary period when potential purchasers align their minds to a new budget,” said Chief Executive of N1 Holdings, Ren Hor Wong.
The appetite for housing loans has also fallen, according to the Australian Bureau of Statistics. They fell 8.5% in July after a 4.4% drop in June. There’s A “Distinct Drop-Off in Purchase Enquiry with The First Rounds of Rate Increases. The size of loans was also smaller and first-time home buyers, who have less borrowing power, retreated. But inquiries for loans improved in the past month, as borrowers began accepting higher rates and smaller loans.
One of the most telling signs of a distressed property market is loan delinquencies. In Fitch Ratings’ latest update, “30+ day mortgage arrears” have fallen in the second quarter of the year. Record-low unemployment has put a ceiling over delinquencies, it said. However, Fitch pointed out there was a three-month lag after interest rates rise, and before a mortgage holder needs to start making higher repayments.
The rating agency expects risks of delinquencies to continue mounting, particularly because Australian workers, while fully employed, will not see their wages rise accordingly. “The extent of the pressure will also depend on the speed and level of interest rate rises and inflation,” it said. However, as recessionary pressures mount vis-à-vis higher interest rates, the tight labour market keeping mortgage repayments intact could start to unravel.
By the time cash rate rises take full effect for mortgage holders, there will be some more pain for households – just not enough to lead to a housing market crash. Additionally, while the recession is a risk for the housing market in Australia, this risk is partially offset by high commodity prices that keep the Australian dollar buoyant and relieve some pressure on the Reserve Bank.