How Do Rising Interest Rates Impact the Property Market? - June 2022
June 3, 2022 / Written by Rich Harvey
By Guest Blogger, Terry Ryder, founder,
hotspotting.com.au and propertyU
Australia is entering a new era in which interest rates are rising and – predictably – we’ve had a massive over-reaction by media in terms of consequences.
The Reserve Bank lifted the official interest in early May, much sooner that it originally indicated, largely it seems because there has been a spike in inflation. Covid-related shortages of supermarket items and Russia/Ukraine-related increases in petrol prices have been a major component in rising costs that have inspired higher inflation numbers.
The RBA for a long time maintained an official attitude that there would be no rate rises before 2024, but that was because the economists who work for the bank aren’t so good at forecasting things. They got it wrong – and they will be wrong again with their forecast that rising interest rates will cause a 15% fall in Australian property prices.
Why do the RBA & Bank economists get it wrong?
Let’s face it, bank economists are tunnel-vision creatures – including the ones who work for the RBA and for the Big 4 banks. They see interest rate levels as being the sole factor in determining whether property prices rise or fall.
In this simplistic mindset, low interest rates mean rising prices and higher interest rates mean falling prices. The economists who hold to this view clearly aren’t students of history. If they were, they might have noticed that previous nationwide property booms in Australia have happened during times of very high and rising interest rates.
They have managed to ignore that in concluding that the current boom was caused by low interest rates (it wasn’t) and therefore that rising interest rates will reverse it (it won’t).
Let’s look at some of the realities.
We’ve had one interest rate rise and we still have ultra-low mortgage rates in Australia. We’ve been told to expect more rate rises but the Commonwealth Bank CEO Matt Comyn says many analysts have grossly exaggerated how high rates will go. By his estimation, we may end up with an official cash rate at 1.6% in a year’s time, which means we will still have very low mortgage rates in Australia.
Most major lenders have issued statements confirming that the vast majority of their customers will be comfortable with higher rates, because they are well ahead on their repayments, and they have built up savings during the period of Covid restrictions.
ANZ and Westpac both say three-quarters of their customers are well ahead on their repayments and BankWest says 90% of their customers are ahead.
This is because most borrowers, when interest rates were falling, could have asked their banks to lower their monthly repayments - but didn’t bother to do so. They kept making monthly repayments much higher than they needed to. This means that, despite the recent rise in mortgage rates, they could still ask their bank to lower their monthly repayment levels.
The other big buffer in the system is the requirement by APRA that lenders assess their borrowers on their ability to repay loans at much higher interest rates. Someone seeking a loan today will not be assessed at 2.5%, they will be assessed at 5.5%.
This means mortgage rates could double and most borrowers would still be able to comfortably service their mortgages.
Will we see mortgage defaults soon?
So, will rising interest rates cause massive levels of mortgage stress? Absolutely not.
You will be seeing lots of media headlines declaring that mortgage stress will be rampant, but these will represent dishonest, sensational and shallow attempts at clickbait generation, nothing more. Sadly, typical of our media organisations and the people who exploit them for cheap publicity.
The other major strand of the media reaction, also over the top, is the speculation on what it will mean for property prices.
The proposition put forward by most writers, fuelled by attention-seeking economists, is that rising rates means falling prices.
If that were to happen, it would be unprecedented in Australia.
Can we have rising interest rates and rising property prices?
The last time Australia had a phase of rising interest rates was from 2002 to 2008. In that time, according to leading research analyst Simon Pressley, there were 22 increases in the standard variable rate for mortgages.
Borrowers were typically paying 8% and later 9% on their mortgages.
And during that period of high and rising interest rates, property prices more than doubled in most markets across Australia.
Pressley says that house prices rose more than 100% in six of the eight capital cities and in dozens of major regional centres across Australia. In some locations, the growth was between 150% and 200%.
There was a similar scenario during the 1980s, when Australia experienced an extraordinary residential property boom in a climate where mortgage rates were above 10% and rose repeatedly until reaching 17%.
The lesson from history is that periods of high and rising interest rates tend to deliver property booms with rapidly rising prices – quite the opposite to the scenario predicted by journalists and economists in the current climate.
And, as a final thought, consider this. In the second half of May, after increasing their standard variable interest rates in line with the Reserve Bank rise, the major banks started cutting their interest rates for new customers.
Competition remains strong among the major mortgage lenders, so if you approach one of the major banks for a new loan, you will be paying an interest lower than the prevailing level before the Reserve Bank decision.
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