What does the current outlook for rising interest rates mean for housing in 2022?
All the major banks are predicting rate rises this year – some as early as June.
And they are also predicting property values to drop significantly in 2023.
Will this really happen?
Well...the latest wages data showed "real" wages (inflation adjusted) falling, this will put a lid on rate rises for some time.
Source: ABS, Dr. Andrew Wilson, My Housing Market
We know the Reserve Bank is being patient and is unlikely to raise rates as quickly as many are expecting, or by as much as many are predicting.
If that is the case, then the ramifications for the housing market are unlikely to be as dramatic as those property crash predictions you're reading about in the media.
Of course, the banks have already raised fixed term interest rates over the last few months and there's little doubt that we're past the peak of house price growth and now the pace of growth will slow as already high home prices, and bottoming mortgage rates erode affordability.
At the same time, buyers have more choice as vendors are placing their properties on the market for sale, possibly with the hope of taking
So back to the original question…
What does all this mean for house prices moving forward?
Here's what she thinks will happen:
1. Mortgage rates to rise independently of the RBA
Even if the RBA keeps the cash rate at a record low of 0.10% until early 2023, Creagh believes mortgage rates will rise.
Creagh explains that fixed rates have already risen off record lows and have been creeping higher in recent months, but variable rates have been largely falling, as a competition among lenders remains strong.
This means new borrowers haven’t necessarily seen their budget shrink.
However, bank funding costs are on the rise, and this is likely to see variable rates heading higher later this year.
Even more so if the RBA does raise the cash rate this year.
Rising mortgage rates will restrict the amount that new borrowers can achieve, and existing borrowers will see higher repayments.
Already high home prices, along with bottoming mortgage rates, will slow annual price growth.
2. Mortgage rates to remain low by historical standards
Despite being set to rise in the year ahead, Creagh believes repayment costs for housing will remain historically low.
When the RBA raise interest rates, mortgage rates will continue to head higher.
Although borrowers may see higher repayments sooner than was previously anticipated, the RBA is likely to increase rates slowly while exiting emergency policy settings.
This means repayment costs are likely to remain low by historical standards.
3. Households are sitting on a once in a generation boom in savings
Despite the ravages of the Covid pandemic, Australians are wealthier than they ever have been. Creagh explains:
‘Household savings’ correspond to the ratio of household income saved to household net disposable income during a certain period of time.
In the September quarter of 2021, the household saving ratio increased to 19.8% from 11.8% in the June quarter.
This has been driven in part by the lockdowns in Sydney and Melbourne whereby households had fewer avenues to spend money.
In addition, government support payments, tax relief and dividend payments have seen incomes increase, while households spent less, presenting a sizeable cushion for households to fall back on.
4. The value of assets and household wealth has surged
Homeowners and property investors have just experienced a once-in-a-generation property boom.
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This has meant household wealth has surged as Creagh explains:
‘Household wealth’ refers to households’ gross assets - homes, superannuation, holdings of financial assets, cash and term deposits, along with durable assets like cars and household furnishings.
The value of Australian homes (and the wealth of homeowners) has surged in recent years, and the increase in the value of financial assets, like equities, has been equally remarkable.
Data from the Australian Bureau of Statistics (ABS) shows the total value of Australia’s housing stock hit an all-time high of $9.26 trillion in the September quarter of 2021. Other ABS data shows total household wealth rose by $590 billion, or 4.4%, hitting an all-time high $13.92 trillion in the September quarter of 2021. That’s up 20.2% on a year ago – the largest annual gain in more than a decade.
The rise in the value of assets relative to debt has placed household balance sheets in a historically strong position.
5. Strong buyer interest and the relatively low volume of stock available for sale will underpin our property markets
The usual supply and demand factors will underpin our markets as Creagh suggests:
All these factors will contribute to the ramifications for the housing market being less than some may perceive.
But in addition, the relatively low volume of stock available for sale coupled with still strong buyer demand is set to underpin the housing market.
Though the recent increase in new listings has cooled some of the extreme competition, giving buyers extra choice, since February 2020 the total number of properties listed for sale has fallen 35%.
Breaking it down further, views per listing on realestate.com.au reached a new historic high in January 2022.
This represents an ongoing disconnect between the supply of properties for sale and demand, which will continue to create upward price pressures, particularly in areas where the available supply of properties for sale remains very constrained (Brisbane, Adelaide, regional areas).
6. Investors, equity gains, and transaction volumes
Creagh also clarified a number of other drivers of our property markets moving forward...
Many current homeowners have accumulated substantial equity gains, following the recent run up in housing prices.
Remote work arrangements and the experience of lockdowns have seen housing preferences shift, both the type of dwelling and location are being reassessed.
The combination of these two factors should support transaction volumes in 2022.In addition, increased economic certainty will see those that held back during lockdowns last year having the opportunity to transact.
As economic uncertainty has subsided the combination of low borrowing costs, ongoing capital growth and attractive rental yields are reawakening investor activity.
Investor mortgage demand has increased from a record low of around 20% of new lending to more than 30% according to the ABS.
In addition, as international borders reopen, and skilled migrant workers and international students return, the renewed demand for inner-city rentals and increased rental price pressures may further entice investors into action.
Investor enquiry on realestate.com.au climbed steadily through 2021 and is now 30.4% higher year-on-year, with the share of enquiry from investors hovering around the highest level recorded in more than three years.
Increased action from investors is also likely to underpin activity in the year ahead.
7. Inflation is higher, but the RBA is also waiting for wages growth
While the money markets are expecting interest rates to rise sooner rather than later, and some are suggesting a number of interest rate rises this year (2022), the RBA keeps reiterating "patience" with respect to raising interest rates and inflation. Creagh explains:
Explicitly, the board are waiting for wages growth closer to 4%. Until there is empirical evidence that wages growth is significantly higher than present, the cash rate is unlikely to be rising. For inflation to be sustainable, wages will need to be growing at a stronger clip.
To date, both the labour market and inflation have strengthened faster than expected.
This may continue, which would increase the likelihood that the cash rate rises in 2022, but there would need to be a significant pick-up in wages for the cash rate to rise this year.
When the RBA raises rates, wages will be higher, and the economy will have strengthened.
The economy has recovered through the pandemic better than expected. Employment is above pre-COVID levels, and the unemployment rate has fallen from its peak in July 2020 to 4.2% currently - a 13-year low and well below the +5% unemployment rate prior to COVID-19.
The RBA is waiting for a sustained pick up in wages growth before raising the cash rate so that they can be sure inflation is sustainably in the target range. This means that by the time interest rates rise, an increase in wages growth will buffer the increase in mortgage rates.
The RBA will not hike rates so far and fast that the economy goes backwards and housing market crashes. And the central bank is cognisant of the ramifications of getting this wrong, particularly when it comes to housing.
If rates rise too far and too fast it would promote sustained weakness in the economy and housing market. As a result, fewer people would have jobs and wages growth would be weaker – an outcome that would not be desirable to the RBA and their full employment objective.
It's important to remember that interest rates will only rise when the economy will have strengthened significantly and consistently, inflation will have remained in the 2-3% band for some time and wages will have increased.
The buffers that households have accumulated will continue to underpin the economy and, though housing price growth is set to slow this year, property values are unlikely to fall.