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As rates rise, house price growth halves

Reserve Bank of Australia

The New Year could bring some long-awaited relief for homebuyers as rising mortgage rates are expected to bring down house prices.

Despite the Reserve Bank of Australia (RBA) keeping the cash rate on ice, at its historical low of 1.5 per cent, the banks are beginning to increase interest rates — some by as much as 0.6 per cent. And with property investors taking the brunt of the rate hikes, demand could ease significantly, leading to a much less competitive housing market.

According to the latest housing finance figures from the Australian Bureau of Statistics (ABS), the value of loans to investors increased by 0.7 per cent in October, while loans to owner-occupiers dropped 0.8 per cent — suggesting much of the urgency in the housing market is coming from property investors, who are known to be sensitive to interest rates.

“There is a strong correlation between lifting interest rates and investors — whether it is the Reserve Bank or banks raising [rates] outside of policy,” Savanth Sebastian, senior economist at CommSec told news.com.au.

“With the perception of higher rates it could certainly create a little bit more softness in the market.”

AMP chief economist Shane Oliver pointed out the “distinct softening” in the market following the Australian Regulation Prudential Authority’s (APRA) clampdown on property investment — when it wrote to banks warning them not to exceed annual growth of 10 per cent in loans to investors and prompting them to increase investor rates.

“There was a period through the latter part of 2015 where APRA measures weighed heavily on investor loans in the form of cutbacks to investors and higher interest rates for them — and that led to a distinct softening in the market through the latter part of last year and into the early part of this year,” Mr Oliver told news.com.au.

Investors did end up returning to the market fairly quickly throughout this year, but Mr Oliver warned the impact could be more significant this time, as increased apartment supply hits the market and banks face rising funding costs flowing from higher bond yields.

“It may not prove as temporary this time around. The risk is it results in a more significant and lasting softening than what we saw at the end of 2015,” Mr Oliver said.

Homebuyers can expect house price growth to almost halve in 2017, with Mr Sebastian forecasting growth of just 5 per cent nationally next year. The latest growth figures from CoreLogic show prices across Australia’s combined capital cities grew by 9.3 per cent in the 12 months ending November 2016.

“We know that every region is very different and I think there are going to be pockets of weakness, particularly with the amount of supply that is likely to hit the market in some of the capital cities,” Mr Sebastian said.

“In the apartment market in particular, I think as that supply hits the market and rates look likely to lift, it could have an impact in curving price momentum.”

Melbourne and Brisbane are expected to be impacted the most by increased supply and rising rates, with Mr Sebastian saying the cracks are already “starting to open up”.

In November, apartment prices in Melbourne dropped 3.2 per cent and apartment prices in Brisbane fell 0.3 per cent.

On the other hand, Sydney will be more resilient, as its housing market is more “spaced out in terms of apartment growth and in terms of the amount of stock”, Mr Sebastian said.

Mr Oliver predicts there will have an “outright decline” in apartment prices nationally in 2018.

Homebuyers should be prepared for further rate rises, despite the Reserve Bank predicted to keep the cash rate on hold throughout 2017. Mr Sebastian said it is likely we are only at the beginning of the hiking cycle.

“US government bonds and Australian bonds have already lifted quite substantially — they are up 70-80 basis points across the curve in the last month to month-and-a-half,” he said.

“I think the market is ahead of policy makers in terms of highlighting the risks around inflation and it does seem to suggest that higher rates are on the agenda.”

Mortgage Choice chief executive John Flavell also indicated rates are only going to get higher.

“Moving forward, I would expect to see more lenders lift their rates. Borrowing costs are increasing, as are long term bond rates — both of which suggest further rate rises are just around the corner,” Mr Flavell told news.com.au.

However, he believes higher borrowing costs won’t impact demand too much.

“Even though rates are likely to move slightly higher over the coming months, it is important to note that interest rates, on the whole, continue to sit at very low levels,” Mr Flavell said.

“As a result, the cost of borrowing is currently very affordable and will remain so for the foreseeable future, which will also help to keep heat in the property market. While some areas may be impacted by the rising rate environment, other areas will continue to see strong demand, low supply and rising property prices.”

Mr Sebastian added that an extended period of historically low interest rates also means homebuyers have built up plenty of equity to sustain future rate rises, meaning demand — particularly from investors — won’t be impacted by as much as it could be in a rising interest rate environment.

“Given rates are still significantly lower than what we have had in history, I think the impact on households and potential investment will be relatively muted still,” he told news.com.au.

“The household budget is still looking relatively healthy and mortgage holders are well ahead on repayments, so it is not likely investors are going to be squeezed by much.”

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Paul

The author Paul