The rising interest environment is new for younger investors, so how can it impact property markets today?" - Matthew Lapish, Senior Investment Analyst
Average mortgage rates have more than doubled since the Reserve Bank began its hiking cycle in May last year, but not everyone is being impacted equally.
This time last year, mortgage holders were dishing out about 2.9% in interest, while this has now increased to 5.9% – and could go even higher.
Some Australians are being hit much harder than others.
Around two-thirds of Aussie households own a home. Of these, just under half have no mortgage. While property prices have seen declines over the past year, in most markets they remain significantly higher than their pre-pandemic levels.
Thus, a significant portion of homeowners have seen substantial equity gains over recent years, without the burden of higher mortgage repayments.
Across Australia, the average loan size was $601,000 in January 2023, up from $504,000 just three years earlier. This means that homeowners who bought more recently are likely to pinched harder, as the relative impact of interest rates on a larger loan is greater.
But the average loan size also varies across the country. New South Wales and Victoria are the most expensive states in which to buy a home, with the average loan sizes peaking at $803,000 and $651,000 respectively back in January 2022.
In contrast, the average loan size has never surpassed $500,000 in South Australia, Western Australia, Tasmania, and the Northern Territory.
Again, this means that the relative impact of rising interest rates varies across the country and accounts for the larger price declines seen in the more expensive states.
Australia’s population is growing again and with more people comes the need for more homes. Unfortunately, development activity has started to slow.
The total number of dwelling units approved has been trending down for two years, hitting the lowest level seen in more than a decade in January, with dwelling commencements likewise in decline.
The rising price of building inputs, labour and materials shortages, and construction timelines have all contributed to cost blow outs.
Now, interest rates are acting as a further impediment, by increasing the cost of funding new developments.
The impact of the 10 consecutive interest rate rises seen so far has been to curtail the average buyer's borrowing capacity by around 30%. With buyers able to borrow less, the total amount they can spend has fallen and this has reduced prices.
Home prices have fallen by 3.9% from peak levels nationally, with the largest falls seen in Sydney, down 7%, and Melbourne, down 6%.
While the speed at which prices are falling has slowed – with prices even rising slightly over February – this decrease in borrowing power will continue to impact how much buyers can pay.
However, interest rates aren’t the only driver of property prices in Australia.
To date, the level of price falls has been cushioned by lower levels of properties being listed for sale, effectively reducing supply.
Similarly, a slowdown in development activity in combination with an acceleration in population growth could place a floor under how far prices can fall over the coming years.
So far borrowing capacities have decreased to a far larger extent than prices have fallen, pricing some buyers out of certain areas.
This is drawing more buyers to affordable suburbs and regions, helping to support demand and prices in these areas.
In contrast to the declines seen in the market at large, prices have held steady and, in certain cases even increased, in many of the more affordable suburbs. A trend that looks set to continue.
Flaherty, A. (2023, March 8). Who'll be hit hardest by the RBA's 10 interest rate rises and counting? Search for Real Estate, Property & Homes - realestate.com.au. https://www.realestate.com.au/insights/wholl-be-hit-hardest-by-10-rate-rises-and-counting-what-the-rbas-tact-means-for-property/