RBA suggests new homebuyers could ultimately benefit from higher rates

February 22, 2023

Higher interest rates have cut the maximum amount people can borrow and lifted their mortgage repayments but could ultimately benefit new homebuyers, according to a senior Reserve Bank of Australia official.

Jonathan Kearns, the RBA’s head of domestic markets, said the central bank’s rapid rate hikes have reduced borrowers’ maximum loan size by about 20% and lifted repayments by a quarter.

While the immediate impact was an increase in the cost of owning a home, Mr Kearns said over time the decline in demand for housing and therefore housing prices meant a household would need a smaller mortgage to buy a first home or upgrade.

2g

“Estimates suggest the net effect is that mortgage payments for new buyers would be higher for about two years as a result of higher interest rates,” he told a property conference on Monday.

“But after that, the declines in housing prices and mortgage size begin to dominate.

“This exercise obviously abstracts from the many other factors influencing interest rates and housing prices, but it suggests that because higher interest rates reduce housing prices and so mortgage sizes, mortgage payments for new borrowers could ultimately be lower than if interest rates had not increased.”

The RBA has lifted the cash rate by 225 basis points since May to 2.35%, in the fastest hiking cycle since 1994.

Mr Kearns said the increase in mortgage interest rates will have reduced borrowers’ maximum loan size by about 20%, noting lenders apply a serviceability buffer 3% higher than the current rate in their loan assessments.

“And because the assessment rate also applies to any existing debt, the decrease in borrowing capacity is even larger for prospective borrowers who have existing debt, such as property investors.”

But he said only about 10% of borrowers take out a loan close to the maximum possible size.

“As a result, even if all borrowers’ maximum loan size is reduced by 20% in response to higher interest rates, not all new borrowers will have to take out a loan that is 20% smaller.

“For many borrowers, the amount they spend on a new home would decline only slightly or not at all (including because their savings to be used as a deposit need not decline with higher interest rates).”

Mr Kearns said the 225 basis point increase in mortgage interest rates also meant monthly payments on a new principal and interest 25-year loan will be around 25% larger, which can influence how much people want to borrow.

“It is important to note that this does not mean that all existing borrowers’ actual loan payments have increased by one-quarter,” he said.

About 35% of home loans are fixed-rate mortgages, and those borrowers will not face an increase in their interest expenses and loan payments until their fixed rate expires.

Mr Kearns said a large share of variable rate borrowers have been making excess mortgage payments into offset and redraw accounts.

“For many borrowers, these larger payments will mean that actual payments need not increase by the full amount of the change in required payments that result from the higher interest rate.”

‘Considerable uncertainty’ about rates impact on home prices

While the RBA has pointed to the possibility of housing price falls of 10% or 15% on the back of its rate hikes, Mr Kearns said the extent of the impact remains uncertain.

“Overall we know that higher interest rates will tend to depress residential and commercial property prices but there is considerable uncertainty about the magnitude and even the timing,” he said.

RBA modelling in April estimated a 200 basis point increase in interest rates would lower real housing prices by around 15% over a two-year period.

Mr Kearns said it was not a forecast but rather an estimate of how sensitive housing prices are to interest rates.

Noting that many other factors also influence housing prices, Mr Kearns said the impact of interest rates on prices depends not only on how much they change but for how long.

“If interest rates were assumed to be 200 basis points higher forever then this model suggests that housing prices would end up being around 30% lower than if interest rates had not changed.

“It is notable that these estimates based on historical data show that the change in housing prices occurs relatively slowly, certainly more slowly than for the prices of financial assets.

“The model also suggests that if interest rates reverted to their initial level after that two-year period, the interest rate effect on prices would be expected to eventually unwind.”

At a federal parliamentary hearing on Friday, RBA governor Philip Lowe said he expected housing prices to fall further as interest rates continue to increase and would not be surprised if prices fell by a cumulative 10%.

1g

Mr Lowe noted that even then housing prices would still be up 15% over three years, after a 25% rise in two years during the pandemic boom.

Mr Kearns said RBA research found interest rates can have larger effects on housing prices in locations where the supply of housing is less flexible, mortgage debt is higher, there are more investors and incomes are higher.

He said the researchers found housing prices in the most expensive areas are the most sensitive to interest rate changes, adding there is some evidence that detached houses are more sensitive to rate changes than apartments.

“Overall this indicates that an increase in interest rates narrows the distribution of housing wealth since more expensive properties experience a larger fall in prices.

“But their results suggest that this distributional effect is temporary as the effects of interest rates on more expensive and cheaper properties converge over time.”

Source: realestate.com.au

You might be also interested in

Capi Ca9eb55150deef6ab89d0c754fe75e96 286afd6f86c9ad73014c3dcce08d066a
International governments, super funds and global business giants cashing in on Aussie home building boom revealed
International property giants and super funds are splashing huge sums buying into Aussie builders and developments as they look to cash in on the nation’s housing crisis. While the investments
VIEW POST
41 Battle Boulevard Seaforth 1
‘Wouldn’t hesitate’: What’s behind the biggest pre-spring city real estate rush in over a decade
Homebuyers will have plenty of fresh properties to inspect this spring, as new listings in Australia’s capital cities reached their highest levels for August in more than a decade.   Capital
VIEW POST
45fdd9c6f3351cdc015447975ce17892
The surprising change facing new units in Australia
Typically, units cost less than houses and can provide a more affordable entry point into property ownership compared to houses for many homebuyers. Ten years ago, the median price of a
VIEW POST
Gettyimages 2007503834
How many Victorian investors have sold due to higher land taxes?
Changes to land tax thresholds in 2024 increased costs significantly for investors in Victoria, but how many of them have responded by selling their rental properties? Analysis comparing the number
VIEW POST
111 1600x1080
Neighbourhood Guide – Footscray
Melbourne is home to several neighbourhoods with impressive transformations, and Footscray is one of the most remarkable examples. Once known as a working-class area with a rough reputation, it has
VIEW POST
Undefined 300x158 1600x1080
Investors borrowing rises 35.4%
Property investors committed to $11.71 billion of home loans in July 2024, which was the second-highest month on record, according to the Australian Bureau of Statistics. It was also 35.4%
VIEW POST
845ddd5655ce6af21d5deeee1b9a3c97 1600x1080
Growth cools in Australian housing values through winter as Melbourne median slips below Perth and Adelaide
National home values increased 0.5% in the month of August, the 19th consecutive month of increase in home values. However, the pace of growth is showing clear signs of slowing. National home
VIEW POST
381d7b785e5423faaa910103e75208b4 1600x1080
The end of the rental boom is in sight
Rents flatlined in July and August as rental demand weakens amid slowing migration and affordability constraints forcing a change to household formation. After rocketing 39% higher between August 2020 and
VIEW POST
Capi 1d1ab9647669ddc418a06c531ce53e0a 436c1a60ecedfc0d046c3f134ad93dcb
US cuts interest rates: Will Australia be next?
The US Federal Reserve has voted to lower interest rates by 0.05 percentage points in a sign that the global war on inflation is finally coming to an end. And
VIEW POST
Gettyimages 2030994565
Rising buyer concerns: Is now a good time to buy property?
New data has revealed there are more buyers concerned that now is not a good time to purchase a property compared to last year. In the most recent Residential Audience
VIEW POST

Get your Free Property Guide.

Here goes your text ... Select any part of your text to access the formatting toolbar.

Get your free Sales Report for RBA suggests new homebuyers could ultimately benefit from higher rates

Get your free Sales Report for RBA suggests new homebuyers could ultimately benefit from higher rates

Subscribe to hear the latest

Start The Conversation Today.

Call us on:

1300 850 730

Request a Callback:

Send us a Message:

Privacy Policy

Get your Free Property Guide

Get your free Suburb Report for RBA suggests new homebuyers could ultimately benefit from higher rates

Privacy Policy

Who we are

Suggested text: Our website address is: https://motionproperty.com.au.

Comments

Suggested text: When visitors leave comments on the site we collect the data shown in the comments form, and also the visitor’s IP address and browser user agent string to help spam detection.

An anonymized string created from your email address (also called a hash) may be provided to the Gravatar service to see if you are using it. The Gravatar service privacy policy is available here: https://automattic.com/privacy/. After approval of your comment, your profile picture is visible to the public in the context of your comment.

Media

Suggested text: If you upload images to the website, you should avoid uploading images with embedded location data (EXIF GPS) included. Visitors to the website can download and extract any location data from images on the website.

Cookies

Suggested text: If you leave a comment on our site you may opt-in to saving your name, email address and website in cookies. These are for your convenience so that you do not have to fill in your details again when you leave another comment. These cookies will last for one year.

If you visit our login page, we will set a temporary cookie to determine if your browser accepts cookies. This cookie contains no personal data and is discarded when you close your browser.

When you log in, we will also set up several cookies to save your login information and your screen display choices. Login cookies last for two days, and screen options cookies last for a year. If you select “Remember Me”, your login will persist for two weeks. If you log out of your account, the login cookies will be removed.

If you edit or publish an article, an additional cookie will be saved in your browser. This cookie includes no personal data and simply indicates the post ID of the article you just edited. It expires after 1 day.

Embedded content from other websites

Suggested text: Articles on this site may include embedded content (e.g. videos, images, articles, etc.). Embedded content from other websites behaves in the exact same way as if the visitor has visited the other website.

These websites may collect data about you, use cookies, embed additional third-party tracking, and monitor your interaction with that embedded content, including tracking your interaction with the embedded content if you have an account and are logged in to that website.

Who we share your data with

Suggested text: If you request a password reset, your IP address will be included in the reset email.

How long we retain your data

Suggested text: If you leave a comment, the comment and its metadata are retained indefinitely. This is so we can recognize and approve any follow-up comments automatically instead of holding them in a moderation queue.

For users that register on our website (if any), we also store the personal information they provide in their user profile. All users can see, edit, or delete their personal information at any time (except they cannot change their username). Website administrators can also see and edit that information.

What rights you have over your data

Suggested text: If you have an account on this site, or have left comments, you can request to receive an exported file of the personal data we hold about you, including any data you have provided to us. You can also request that we erase any personal data we hold about you. This does not include any data we are obliged to keep for administrative, legal, or security purposes.

Where your data is sent

Suggested text: Visitor comments may be checked through an automated spam detection service.

Get your Free PDF copy of Make Money Simple Again