Huge myth about interest rise debunked as housing affordability to worsen, says report

As interest rates began to rise this year, many Australians thought it may be their chance for a break – but not everything is as it seems.

As interest rates began to rise this year, many Australians were worried about how they would be impacted by the move designed to take the sting out of rising inflation.

Australians with large home loans were among those most concerned, but there were also key demographics who were considered to be winners in the new normal of rising rates.

Pensioners with large amounts of savings were one, but it was a battered generation of younger Australians looking to get a foot in the housing market that were seeing the RBA’s decision in the most positive light.

They had been left by the wayside as property prices continued to surge to astronomical levels – slipping further and further out of reach as time went on.

The RBA’s rate rises offered a glimmer of hope that house prices would comes down; and we are already starting to see property prices dip.

Property prices nationally fell by 0.1 per cent in May, the first monthly drop since September 2020. Now experts are warning they could fall by a whopping 20 per cent across Australia in the next 18 months.

However, this may not be the big win that some younger Australians think it is.

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Property prices across Australia are starting to drop. Picture: Brendon Thorne/Getty Images

Housing affordability to worsen

In a bombshell report, analysts at Moody’s Investors Service said that even if house prices tumbled by more than 20 per cent it would not solve the country’s housing affordability crisis.

In fact, they say it would make it even worse as higher interest rates will make it harder for new buyers to meet mortgage repayments, even on much cheaper homes.

They said that in January, the average Aussie household with two incomes needed 25.7 per cent of their monthly income to meet the repayments on a new mortgage loan. In May, that had risen to 26.8 per cent, and they expect it to keep rising.

If we’re talking about the two major cities, Sydney and Melbourne, that figure becomes even more concerning. Average Sydney households needed 37 per cent of their income to make their loan repayments. In Melbourne they needed 29.8 per cent, according to the research.

According to Moody’s analysts, affordability will continue to decline despite falling property prices because increasing interest rates will drive up mortgage repayments.

Mortgage rate rises will outstrip any benefits of falling prices for homebuyers according to Moody’s. Picture: NCA NewsWire/David Crosling

“We expect housing prices to decline over the rest of this year and into 2023 as rising interest rates weigh on property market sentiment,” they said.

“Based on our assessment of different housing price and interest rate scenarios, we expect that prices will not decline to the extent that housing affordability improves while interest rates are rising this year.”

Moody’s modelling shows if the RBA raises the cash rate to 2.85 per cent and property prices decline by around 10 per cent, housing affordability will continue to worsen.

“If the RBA raises the cash rate to 2.85 per cent this year, our modelling shows housing affordability will continue to worsen unless housing prices decline by around 22 per cent, a materially bigger decline than we currently expect by the end of this year,” Moody’s said.

ANZ meanwhile has predicted that the cash rate will reach 2.6 per cent by early next year, which the bank’s economists estimate will bring property prices down 5 per cent in 2022, and a further 10 per cent next year.

However, Moody’s warned that even if the cash rate ended the year at 2.35 per cent, house prices would need to decline by 22 per cent to see even a tiny improvement in affordability.

RBA chief to speak amid rising inflation

Reserve Bank governor Philip Lowe will today give a talk entitled “Inflation and Monetary Policy” to the American Chamber of Commerce in Australia.

He is expected to talk about comments he made in a rare television interview last week on ABC’s 7.30 in which he said the bank would do whatever it takes to bring inflation back to within the RBA’s 2-3 per cent target band.

Philip Lowe, Governor of the Reserve Bank of Australia, is giving a speech today. Picture: Lisa Maree Williams/Getty Images

In that interview he predicted that inflation would hit 7 per cent by Christmas and that it wouldn’t begin to fall until the first quarter of the next year, while the cash rate would hit 2.5 per cent.

“I think Australians need to ... be prepared for higher interest rates,” Dr Lowe said.

“We had emergency settings during the pandemic, I think that was the right thing to do, but the emergency is over. And it’s time to remove the emergency settings and move to more normal settings of monetary policy.”

Dr Lowe said he believed it was “reasonable that interest rates get to ... the cash rate gets to 2.5 per cent at some point”.

He added the RBA would do “what’s necessary” to tackle rising inflation.

“It’s unclear at the moment how far interest rates will need to go up to get that,” Dr Lowe said.

“I’m confident that inflation will come down over time but we’ll have to have higher interest rates to get that outcome.”

Originally published as Huge myth about interest rise debunked as housing affordability to worsen, says report