Rate Hikes v.s. Affordability v.s. Borrowing Power

Many experts have predicted that The Reserve Bank may start to increase cash rate as early as end of 2022 or early of 2023 despite of the RBA’s previous forecast in remaining a record low cash rate until 2024.

What we normally see is property booming cooling down when the mortgage interest rate goes up. However, it does not affect the existing property values very much. According to the independent economist Saul Eslake side: “People, if they think their house will sell for less than what they want to sell for, they don’t sell and hold off… it’s turnover in stamp-duty revenue, real estate agents’ commissions and things like that which drop.” (from MPA 27/01/2022).

Similarly to what Sally Tindall, research director at RateCity, said: “Prices are expected to drop when the RBA hikes the cash rate. However, this could still be a year away - and even then, the cost of housing will be too high for many Australians, particularly in Sydney and Melbourne. The damage has already been done.” (from MPA 15/01/2022)

In short, when the RBA hikes rate in the future, current property booming should slowdown with slightly value drops in some neighborhoods. In another words, we should not expect property value falls like hard-crash landing and the affordability should remain similar to today, which does not look good.

However, according to the latest National ANZ-observed spending showing there is no sign of recovery from the Omicron malaise in spending, people are continuously accumulating their cash in the bank accounts. Some of these saving may potentially become the future property purchasing deposit for some investors, extra bed room for some parents for their current owner-occupied home, or the deposit for some families’ next bigger home. We should sill see strong property/construction demand in the coming months in 2022.

Under current home loan borrowing assessment where the borrowers will need to be able to afford the repayment on 3.0% higher than their true home loan interest rate under the agreed loan term with principle plus interest repayment. When the interest rates start to go up, the amount of money the people can borrow will be reduced, which will either compress the number of available borrowers in the market or may drive the borrowers toward to something that is more affordable to them.

In summary, if you can afford to buy today, you should not hesitate to take the action. Or you may find yourself in the situation that not only your borrowing power has been reduced by comparing to 6 months ago, but also most properties you like, the values may have gone up in average.

Ref: MPA - Don't look for rate hikes to improve affordability – experts by Ryan Smith 27/01/2022

Ref: CoreLogic - The 2022 auction market kicked off early with 448 capital city homes taken to auction this week by Caitlin Fono 24/01/2022

Ref: MPA - Mortgage sizes reach record high by Ryan Smith 15/01/2022

Ref: bluenotes - Spending data: Omicron malaise lingers by Adelaide Timbrell