How the RBA’s rate rise could trigger a sharp fall in house prices

31 views 2022-05-06 12:42:36

The Reserve Bank’s earlier and sharper-than-expected interest rate rise of 0.25 percentage points could put a squeeze on recent home owners, spook new buyers and trigger a sharper fall in prices this year, experts say.

“I think the initial shock of the first interest rate rise in more than a decade will really slow the market and put a handbrake on house prices,” Mark Bainey, chief executive of Sydney-based property developer Capio Property Group, said.

“The first rate increase will be a line in the sand to show people this is the new economic reality, and it will be a shock for them to experience multiple interest rate rises.”

The RBA increased the official interest rate to 0.35 per cent at Tuesday’s meeting. It was the first increase in more than 11 years, following a sharp rise in inflation.

Although the initial rate rise was relatively small, it signalled the start of a series of interest rate rises before the end of the year, SQM Research managing director Louis Christopher said.

“This will put further downward pressure on house prices, which has already started to weaken,” he said.

“Interest rate rises spook buyers, who tend to react instantly. I think there will be a sharp drop in the number of buyers. That’s why we’re raising our forecast to a 7 per cent drop in Sydney house prices this year and 8 per cent decline in Melbourne.”

‘Outlook is quite dire’

Even before the RBA raised the official interest rate, buyer demand had plummeted, Mr Bainey said.

“Buyer inquiry levels are down 50 per cent at the moment, so demand has essentially collapsed,” he said.

“Prices are remaining steady, but inquiries are always the best indicator of where prices are going. If inquiries are going down, then prices are going in the same direction. We’re prepared for it, but I think the outlook for the market is quite dire.”

Henderson Advocacy buyer’s agent Jack Henderson said the drop in the number of buyers had already enabled him to bargain hard for his clients.

“A lot of the properties that we’re buying right now are around 10 per cent or 15 per cent cheaper than what they would have sold for six months ago because people are just sitting on their hands, scared about what could happen, so there’s less competition,” he said.

Home buyers who bought in the past year were expected to feel the biggest impact of rate rises as they probably took large mortgages to pay for lofty house prices, Mr Bainey said.

“Anyone who has bought in the last 12 months is going to be the first in line for some pain through the rate rise cycle,” he said.

“They are a generation of home buyers who have never experienced a rate rise, so the harsh reality of a higher mortgage cost has just hit them.”

Sydney-based first-home buyer Peter Nay was among those who bought at the top of the market last year and took out a large loan to buy his apartment in Bondi.

He said a 0.25 of a percentage point rise would not cause him financial distress, although further rate increases would inevitably hit his budget.

“I bought conservatively and did not over-extend my borrowing, so I’m not too worried about this rate rise,” he said.

“However, if mortgage rates rise to 6 per cent or 7 per cent, my repayments will increase by around $3000 per month, which is substantial. This means I’ll have to look at boosting my income and potentially take in a roommate.”

CoreLogic research director Tim Lawless said the extra mortgage repayments many households made during the pandemic should help reduce their risks of defaulting.

“As we enter a period of higher interest rates, borrowers are generally well ahead of their mortgage repayments,” he said.

“Mortgage distress should also be minimised to some extent by mortgage serviceability assessments at the time of the loan origination. All borrowers would have been assessed to repay their mortgage under a scenario of mortgage rates being 3 percentage points higher than the origination rate.

“Under these serviceability scenarios, borrowers should be able to accommodate higher mortgage repayments costs, although such a rapid rate of inflation could create some challenges for borrowers with thinly stretched budgets.”

Dexus more exposed

UBS analyst Tom Bodor said the underperformance of the real estate investment trust sector relative to the broader market so far this year showed that investors had increasingly already factored in expectations of higher rates on the country’s largest institutional developers and investors.

”It has somewhat played out already,” Mr Bodor said. “To some extent, investors may see this as a clearing event and can now reassess the sector.”

However, he said Dexus, which upgraded its guidance on Tuesday for the year to incorporate distribution per security of 2.5 per cent or more, was more exposed to rising interest rates. That was because of its acquisition of the Collimate funds management platform from AMP, as the cost of capital for funds was linked to interest rates.

“It’s heightened the risks that Dexus face,” Mr Bodor said.

Higher rates posed the risk of a “material” slowdown in listings for residential platforms realestate.com.au and rival Domain.

Jarden analyst Elise Kennedy said listing volumes on the two platforms were likely to fall 10 per cent in the six months to June – twice the 5 per cent decline she was previously expecting – and that they would fall 11 per cent in the year to June 2023, more than the 7 per cent previously expected.

Mirvac would probably be the developer most exposed to higher rates. Last week, the company, Australia’s largest diversified developer, said its housing pipeline had taken a hit from flooding in Brisbane and Sydney. It said it had pushed some expected developments into the fourth quarter and into the new year.

– with Michael Bleby

This article is from Australian Financial Review, please click the following link for the original article: https://www.afr.com/property/residential/rate-rise-could-trigger-a-sharp-fall-in-house-prices-20220503-p5ai00

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