Borrowing power slashed by 21pc after fastest rate rise in 28 years
Australia’s fastest interest rate rise in 28 years has hit Queensland homebuyers seven times worse than homeowners, with borrowing power cut by 21.61 per cent after the latest RBA rise.
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Australia’s fastest interest rate rise in 28 years has hit Queensland homebuyers seven times worse than homeowners, with borrowing power cut by 21.61 per cent after the latest RBA rise.
A six month assault on borrowing capability by rampaging interest rates has significantly widened the financial gap between those who have properties and those who don’t, with more properties now out of reach of buyers after the Reserve Bank raised the official interest rate to 2.6 per cent – its highest level since 2013.
PropTrack senior economist Eleanor Creagh said the RBA’s “fastest rise to the cash rate since 1994” had cut borrowing power by 21.61 per cent in six months while home values had only dropped 3.35 per cent since their March 2020 national peak.
Someone who could borrow $500,000 in April was now restricted to around $391,962, while a $2m loan assessment six months ago was now cut to $1,567,850, she said.
RateCity.com.au research director, Sally Tindall, said their analysis showed the average borrower with a $500,000 loan could be paying $687 more a month than they were before hikes started in May, while someone with a $1m loan would be paying $1,374 more a month now.
PRD chief economist Dr Diaswati Mardiasmo warned borrowing capacity had a bit further to fall, with the Real Estate Institute of Australia expecting it to drop by 25 per cent by the time the RBA is done.
“Given that median house price growth in Brisbane and surrounds (quarterly basis) have not declined by 25 per cent, there is a big gap in between a person’s borrowing power and market conditions,” she said.
“Already there is a big gap in the QLD average home loan and purchase price. For owner occupiers it was $532,310 and for first home buyers $431,539 (as of June quarter 2022). For places like Brisbane, Gold Coast, and Sunshine Coast; this is only half of the purchase price (as of Q3 2022 prices). If borrowing power goes down further, the gap will remain, and can even worsen.”
Dr Mardiasmo said with more buyers expected to be priced out of more markets across Qld, some were expected to wait until conditions improved while others would simply buy what they could afford now.
She said those selling property in Ipswich, Redland City, Moreton Bay, and Logan City were still coming out on top despite recent falls in some Qld markets.
“Yes they have lost value on a Q2 2022 to Q3 2022 basis, however considering growth between Q3 2021 to Q3 2022, they are still ahead. Those in Ipswich for example, might have “lost” 2 per cent in the last quarter, but selling now means they would have gained 18.5 per cent (annually). Sellers in Brisbane, Gold Coast, and Sunshine Coast are worse off, however this is normal for the “bigger cities”.”
Holmview woman Rachel Mateo, 52, has seen her mortgage go up by around $400 a month recently and said further rises were “daunting.”
“That cost is more than it has been for us and then you look at fuel going up as well, and you have to think about if you will drive to see your family or what you will pay for, because there are so many challenges everyone has to juggle now,” she said.
“It’s money that I always had to put towards a little bit of a treat or something extra but now my mortgage is eating into that money too, so it is certainly going to be a struggle to keep up with it if it keeps going up.”
Bulletproof Investing author James Fitzgerald believes more affordable areas like Logan will stand out in the current market for affordability but also for the growth that’s coming.
“The Government is tooled up to bring forward infrastructure, projects that focus on improving roads, rail, hospitals, and schools. It’s this that makes areas like Logan and Wide Bay more efficient and attractive.”
Priced out of Brisbane, Joel Petty, 24, looked to half an hour outside the CBD to buy a four bedroom house and land package at Somerfield Estate, Holmview for $450,000.
“I looked at what was available at the Gold Coast and Brisbane, but the Logan region delivered more bang for my buck,” Mr Petty said.
“I couldn’t buy a brand new four bedroom house with a yard in Brisbane for $450,000. Buying in Holmview means extra living space, a spacious home office so I can now work from home more often and I’m close to entertainment, shopping and dining, and only 30 minutes from the Brisbane CBD or 40 minutes from Gold Coast beaches.”
Mr Petty said “there was nothing in my budget at the Gold Coast or Brisbane, whereas Logan offers buyers like myself a far more diverse selection of affordable housing options”.
Ms Creagh warned many mortgage holders who had been shielded for months were “only now beginning to feel the impact of the initial rises” after months of being ahead of repayments, having fixed terms and the lagged effect of increases.
A slowdown “seems inevitable”, she said, despite the tight labour market, advance repayments and savings and wealth buffers.
“Today’s rate hike will further increase borrowing costs and reduce maximum borrowing capacities, pushing property prices further down. In the period ahead, the level of interest rates will be a key determinant of housing market conditions and the pace and depth of home price falls.”
Finance Brokers of Australia managing director Peter White said the October rise was “another huge blow” with “more rises to come” when the Reserve Bank should have acted 18 months ago.
He said the “FBAA was warning of this in early 2021 when no one else was, and we were laughed at by commentators who were listening to the RBA”.
“Their lack of action and lack of foresight has resulted in devastation for many Australian families.”
He said borrowers without significant surplus funds should “think about spending a little less this Christmas and prepare for more rises”.
Anyone refinancing needed to cut discretionary spending which is what lenders looked at, he said.
“Be aware that lenders will assess you not at the current rate, but at a rate approximately three per cent higher, as they take future rises into consideration. This means for many people to meet refinancing criteria, they must be able to meet repayments around five to seven per cent – and likely higher after today – above the rate at which they were approved when they took out their current mortgage. Depending on the amount of the loan, this can equate to more than $2,000 per month higher.”
The RBA 25bp move defied market expectations which had priced in a double lift by 50 basis points, with the ASX 30 Day Interbank Cash Rate Futures October 2022 contract trading at 97.305, indicating a 79 per cent expectation of an interest-rate increase to 2.85 per cent.
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