Mortgage rates should slowly increase in the coming year – and the likelihood of official interest rates also rising in 2022 has firmed.
Although the next move from the Reserve Bank will be to raise rates, they may not rise as quickly as many are expecting. Hence, the ramifications for the housing market are unlikely to be as dramatic as some perceive.
The annual pace of housing price growth is expected to continue to slow, and we expect a continued moderation in buyer demand as already high home prices, along with bottoming mortgage rates, erode affordability.
Greater willingness from vendors to list their properties will provide more choice, improving the imbalance between supply of properties for sale and demand. Along with the benefits of lower mortgage rates having been converted into higher house prices, this should contribute to easing price growth this year.
However, we do not expect housing prices to fall – but several other things will happen when rates rise.
- Mortgage rates to rise independently of the RBA
Even if the RBA keeps the cash rate at a record low of 0.10% until early 2023, mortgage rates will rise.
Fixed rates have already risen off record lows and have been creeping higher in recent months since the RBA’s Term Funding Facility expired, but variable rates have been largely falling, as competition among lenders remains strong.
This means new borrowers haven’t necessarily seen their budget shrink.
However, bank funding costs are on the rise, and this is likely to see variable rates heading higher later this year. Even more so if the RBA does raise the cash rate this year.
Rising mortgage rates will restrict the amount that new borrowers can achieve, and existing borrowers will see higher repayments. Already high home prices, along with bottoming mortgage rates, will slow annual price growth.
- Mortgage rates to remain low by historical standards
Despite being set to rise in the year ahead, repayment costs for housing will remain historically low.
When the RBA raises interest rates, mortgage rates will continue to head higher.
Although borrowers may see higher repayments sooner than was previously anticipated, the RBA is likely to increase rates slowly while exiting emergency policy settings. This means mortgage servicing costs are likely to be close to or below average levels seen throughout the past 20 years.
- Households are sitting on a once-in-a-generation boom in savings
‘Household savings’ correspond to the ratio of household income saved to household net disposable income during a certain period of time.
In the September quarter of 2021, the household saving ratio increased to 19.8% from 11.8% in the June quarter. This has been driven in part by the lockdowns in Sydney and Melbourne whereby households had fewer avenues to spend money.
In addition, government support payments, tax relief and dividend payments have seen incomes increase, while households spent less, presenting a sizeable cushion for households to fall back on.
- The value of assets and household wealth have surged
‘Household wealth’ refers to households’ gross assets – homes, superannuation, holdings of financial assets, cash and term deposits, along with durable assets like cars and household furnishings.
The value of Australian homes (and the wealth of homeowners) has surged in recent years, and the increase in the value of financial assets, like equities, has been equally remarkable.
Data from the Australian Bureau of Statistics shows the total value of Australia’s housing stock hit an all-time high of $9.26 trillion in the September quarter of 2021.
Other ABS data shows total household wealth rose by $590 billion, or 4.4%, hitting an all-time high $13.92 trillion in the September quarter of 2021. That’s up 20.2% on a year ago – the largest annual gain in more than a decade.
The rise in the value of assets relative to debt has placed household balance sheets in a historically strong position.
- High interest from buyers versus the relatively low volume of stock available for sale
All these factors will contribute to the ramifications for the housing market being less than some may perceive. But in addition, the relatively low volume of stock available for sale coupled with still strong buyer demand is set to underpin the housing market.
Though the recent increase in new listings has cooled some of the extreme competition, giving buyers extra choice, since February 2020 the total number of properties listed for sale has fallen 35%.
Breaking it down further, views per listing on realestate.com.au reached a new historic high in January 2022. This represents an ongoing disconnect between the supply of properties for sale and demand, which will continue to create upward price pressures, particularly in areas where the available supply of properties for sale remains very constrained (Brisbane, Adelaide, regional areas).
- Investors, equity gains and transaction volumes
Many current homeowners have accumulated substantial equity gains, following the recent run up in housing prices.
Remote work arrangements and the experience of lockdowns have seen housing preferences shift, both the type of dwelling and location are being reassessed.
The combination of these two factors should support transaction volumes in 2022. In addition, increased economic certainty will see those that held back during lockdowns last year having the opportunity to transact.
As economic uncertainty has subsided the combination of low borrowing costs, ongoing capital growth and attractive rental yields are reawakening investor activity.
Investor mortgage demand has increased from a record low of around 20% of new lending to more than 30% according to the ABS.
- Inflation is higher, but the RBA is also waiting for wages growth
The RBA has reiterated “patience” with respect to raising interest rates and inflation.
Explicitly, the board are waiting for wages growth closer to 4%.
Until there is empirical evidence that wages growth is significantly higher than present, the cash rate is unlikely to be rising. For inflation to be sustainable, wages will need to be growing at a stronger clip.
To date, both the labour market and inflation have strengthened faster than expected. This may continue, which would increase the likelihood that the cash rate rises in 2022, but there would need to be a broad-based pick-up in wages for the cash rate to rise this year, not just in industries where wages have risen as a result of the pandemic.
By industry, the largest wage increases in the September quarter of last year were in construction and professional, scientific and technical services. The construction sector has been driven by stimulus measures and low borrowing costs, while professional services tightness is likely impacted by border closures.
- When the RBA raises rates, wages will be higher and the economy will have strengthened
The economy has recovered through the pandemic better than expected. Employment is above pre-COVID levels, and the unemployment rate has fallen from its peak in July 2020 to 4.2% currently – a 13-year low and well below the 5%-plus unemployment rate prior to COVID-19.
In fact the strength of the recovery in the labour market has been so strong that the RBA has consistently had to revise lower their forecasts of the unemployment rate.
The RBA is waiting for a sustained pick up in wages growth before raising the cash rate so that they can be sure inflation is sustainably in the target range. This means that by the time interest rates rise, an increase in wages growth will buffer the increase in mortgage rates.
The RBA is unlikely to hike rates so far and fast that the economy goes backwards and housing market crashes. And the central bank is cognisant of the ramifications of getting this wrong, particularly when it comes to housing and the impact of lower housing price falls on broader spending across the economy.
If rates rise too far and too fast it would promote sustained weakness in the economy and housing market. As a result, fewer people would have jobs, wages growth would be weaker and overall economic activity would reduce – an outcome that would not be desirable to the RBA and their full employment objective.
The bottom line is that when interest rates rise, the economy will have strengthened.
The buffers that households have accumulated will continue to underpin the economy and, though housing price growth is set to slow this year, values are unlikely to fall in 2022 and any declines thereafter are anticipated to be moderate.
Source: What does the outlook for interest rates mean for housing in 2022?, Eleanor Creagh for Realestate.com.au