House hunters win big and recent buyers lose even bigger as RBA raises interest rate to 0.85%
After years of being battered and bruised by the economy, these Aussies will be celebrating the RBA’s huge rate rise.
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After years of being priced out of the property market, the next few months might be the prime time for would-be house hunters to get their foot in the door of their first home.
Rising interest rates have put the brakes on runaway house prices, which have dropped by 0.11 per cent nationwide in the wake of the Reserve Bank’s drought-breaking cash rate hike in May.
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And with the RBA announcing the interest rate will rise from 0.35 per cent to 0.85 per cent, first-time buyers have every reason to be hopeful price growth will ease further.
Experts have predicted the steadily rising interest rates could drive property prices down 10 to 15 per cent by the end of 2023 or early 2024, which could erase much of the 23.7 per cent increase that capital city properties saw through 2021 alone.
PropTrack economist Paul Ryan told news.com.au before today’s announcement that aspiring home buyers will find the raising rate quite helpful to reaching their home ownership goals.
“Firstly, housing prices, either growing more slowly than they have – and we’ve already seen that through this year – or even falling a little bit, tends to help first homebuyers,” Mr Ryan said.
“Often first-time buyers are limited by how big a deposit they can save. So when the level of prices is high, saving 20 per cent of that level can become more onerous for them.”
He said it helps not having “rampant price growth … where prices were growing faster than people could save deposits”.
“So having things slowed down a little bit can be very helpful for those types of buyers.”
More winners of the rate rise
Aspiring home-owners will not be alone in the rate rise winners’ circle. Self-funded retirees with plush savings accounts, investors, and banks may also feel the perks of the rise.
For borrowers and mortgage-holders, especially those with partially paid loans, the RBA’s efforts to curb inflation won’t be a huge boost, but they won’t be devastating, either.
People who refinanced over the past few years, Mr Ryan said, are “likely to be well-placed to be going back to paying higher rates” – where they were before the pandemic-era rate cuts.
“Of course, we’ve got higher inflation now so there are more asks on their household budget,” he said. “So it won’t be quote-unquote ‘easy’, but they’re going to be better placed, also, because they’re generally households that have been paying their loan for a few years.”
Plus, many homeowners have kept up their pre-pandemic repayments on record-low interest rates, potentially speeding ahead on their mortgages by two years, according to the RBA’s latest Financial Stability Review.
Also winning, investors who may get higher returns on their savings deposits as banks increase their rates to fill their net interest margins following the rise.
Banks and insurers, too, are going to feel the perks of the rise, as long as their customers don’t come into financial strife.
Who loses from a rate rise?
However, despite rising rates working to slow house price growth, Mr Ryan warns they could come back to hit first-time buyers on their way into their new homes. Hard.
Homeowners who bought property in the “past two years, when interest rates were low” will be the “big losers” of rising rates.
“They may be the ones that are in for more of a shock just because they’re, firstly, newer to their mortgage, and they haven’t had the experience of paying those higher rates,” he said.
When the RBA increased the cash rate from a record-low 0.1 per cent to 0.35 per cent in May, it was the first rise since 2010.
Now it has risen 50 basis points – 10 basis points beyond economists’ highest predictions – the highest it’s been since hitting 1 per cent in July 2019.
Within 12 years, 1.1 million Australians became homeowners and had never dealt with a rate rise.
But now they’re facing two in as many months and dealing with a central bank committed to doing “what is necessary to ensure that inflation in Australia returns to target over time”, as RBA Governor Philip Lowe said in May.
Mr Ryan said running head-first into higher mortgage repayments with the most debt young homeowners have ever had is one thing; but with banks expected to tighten their lending standards in return, they may not even be able to borrow as much to bid at auction.
That said, it’s not as desperate as it seems, he said, because lenders would have assessed borrowers’ ability to make higher repayments.
“Lenders have considered this repayment shock and built that into their lending approval decisions,” Mr Ryan said. “But nonetheless, I think it’s going to come to as a bigger shock to those younger, first-time households.”
Also feeling the pinch could be mortgage holders on variable interest rates, and small businesses with large debts.
Originally published as House hunters win big and recent buyers lose even bigger as RBA raises interest rate to 0.85%
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