The 2022-2023 Federal Budget is set to trigger rising interest rates, which may cause Australian house prices to drop by 15 per cent.
Rising interest rates will make mortgage repayments even more expensive for Australian homeowners. In turn, this could see a significant drop in demand for housing and trigger a 15 per cent fall in house prices.
While this may benefit first time home buyers, property investors and current homeowners will ultimately suffer in the event of the first rate hike in more than 11 years.
Current Property Market Predictions
Economists are expecting a rate increase in the region of 1 per cent by the end of 2022.
However, financial markets believe that the rate increase can reach as high as 2 per cent. Consequently, this could add thousands of dollars to mortgage payments for existing and new home loans.
Other predictions from leading financial players include:
- Westpac expects a 14 per cent decrease in house prices by late 2024.
- AMP Capital anticipates a 10 to 15 per cent house price fall by early 2024.
- SQM Research (investment research and data organisation) predicts that house prices will fall by 15 per cent with a 2 percentage point increase in interest rates.
Joust believes that the increase in interest rates would only play out if inflation remained below 5 per cent. If not, the increasing prices of raw materials would offset the drop in home prices enough to keep the market from falling too much.
This might also indicate that the Federal Government has been banking on the inflation increase at the budget announcement.
Losers From Interest Rate Hike
In the event of an interest rate rise, the following Australians may be at a financial disadvantage:
- Home borrowers who have availed of loans to where the debt is more than 6 times their annual income will be at higher risk of defaulting on their mortgages. This is even more concerning considering that these borrowers experienced a 24 per cent increase during the December 2021 quarter.
- Borrowers that are already struggling to save for a 20 per cent home deposit will need even more time to hit their financial goal. Market experts predict that borrowers could take between 5 to 20 years to save for a home deposit (depending on the suburb).
- Borrowers who capitalised on low-interest rates during the pandemic may need to refinance their home loans as early as the 2023 final quarter. This will expose these borrowers to a much higher cost of borrowing that can reach up to 20 per cent.
Another critical risk at large remains - the potential for inflation to drive up the cost of living alongside the possible interest rate rises. As a result, debtors will struggle with their mortgage repayments on top of regular daily expenses.
Such a scenario would leave them with less to no disposable income.
While the RBA has been quick to talk about the "resilience" of the real estate market, borrowers who are heavily indebted and have not been able to cough up significant saving buffers during the pandemic will be at risk.
Winners From Interest Rate Hike
It's not all doom and gloom, as Joust also found several positives to take away from their recent findings.
According to the RBA, only 5 per cent of loans have an outstanding loan-to-value ratio (LVR) greater than 75 per cent. At the beginning of 2020, this was at only 25 per cent.
Ultimately, this indicates that it would take a drop of more than 25 per cent in house prices for 95 per cent of the borrowers to send them into the arena of negative equity.
What Does This Mean For You?
If you're looking to buy a property, it may be wise to wait for prices to drop before taking the plunge. However, if you're looking to sell, it's best to do so sooner rather than later.
It's also important to remember that a drop in house prices doesn't necessarily mean that you'll be able to buy a property for cheaper. With the current market conditions, there are a lot of variables at play here, such as your deposit amount, whether you are availing of any government scheme that may inflate your mortgage and the interest rate (variable or fixed) that you can bag.
Joust can be extremely valuable in these circumstances, considering that our tech-enabled platform can instantly match you with the best possible loan deals personalised to your financial needs. This can help you save thousands of dollars on your mortgage payments, which can be useful if you need to refinance your home in case house prices fall.
If you're worried about the potential risks of taking on a home loan, remember that the market has always been cyclical, and there will always be ups and downs. So the best thing you can do is stay informed and make sure you're in the best possible financial position to weather any storms that may come your way.
