New lending slumps as rate rises continue

New lending for housing has slowed significantly.

In fact, fresh data from the Australian Bureau of Statistics show a further fall of 8.2% month-on-month in September, eclipsing a drop of 3.4% in August.

Obviously, the rapidly rising interest rates have weakened lending demand and buyers’ budgets have shrunk as borrowing capacities have tightened, meaning the maximum available for prospective buyers is less.

According to Eleanor Creagh, Senior Economist at REA, after moderating in September, the pace of home price declines slowed last month as the spring selling season continued.

Rate rises continue to bite

The latest PropTrack Home Price Index showed that national home prices recorded only a small decline in October.

Prices have fallen persistently after peaking in March 2022 but fell just 0.06% in October – the smallest decline since home prices peaked.

Ms Creagh commented:

"Interest rate increases continue to be the primary driver of home price falls.

The Reserve Bank has now raised the cash rate by 275 basis points in the past seven months.

The last time rates rose this fast was in 1994 when the RBA took the cash rate from 4.75% to 7.5%.

That was delivered in larger increments resulting in a 275 basis point rise, in just five months.

The sharp increase in interest rates is significantly constraining borrowing capacities and increasing borrowing costs.

That’s seeing demand from would-be homebuyers moderate."

The new data from the ABS showed the value of new lending for housing fell 8.2% month-on-month to a two-year low.

It can be noted that the decline has been more pronounced for owner-occupier buyers (first-home buyers and subsequent buyers), with new loan commitments down 9.3% month-on-month, which is the largest monthly slump in at least two decades.

Although, new lending to owner-occupier buyers remains 23.2% higher than the pre-pandemic level seen back in February 2020.

Ms Creagh further commented:

"New lending to investors also fell 6% month-on-month to be 15.3% lower than a year ago but remains 59.8% higher than the pre-pandemic level.

Refinancing also slid this month after surging to an all-time high in August but was up 7.4% from a year ago.

Refinancing activity is supported by the rapidly rising interest rate environment, fixed-term expiries and substantial equity gain accumulated since the pandemic onset incenting equity extraction via cash-out refinancing activity.

Although price falls moderated in October, the RBA is set to continue raising interest rates, and revised their inflation forecast to hit 8% by the end of the year – a new 32-year high and well above its target band.

This indicates that although the slower pace of rate rises may be maintained, the RBA may hike for a longer period.

Rising interest rates not only increase repayments but reduce the amount prospective buyers can borrow.

Now the cash rate is sitting at 2.85%, maximum borrowing capacities have dropped by more than 20%.

The reduction in borrowing capacity will push home prices further down.

We expect they will continue to fall throughout this year, although they will be offset by factors including low unemployment, housing supply pressures, and rebounding migration."

What a 25 basis point rate rise means?

The rate rise means a potential repayment increase.

For example, an owner-occupier variable borrower with a loan-to-value ratio of 80% based on the median home value in Sydney of $961,000 could see their monthly repayments climb a further $115 after 1st November's hike, following a significant increase already this year.

Source of commentary and charts: REA Insights

About Brett Warren Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.