The rise of rates set to bite Adelaide buyers
While home prices have been falling across the country, South Australia has continued to defy the downturn to see prices rise further in October to a new peak. But Adelaide will not be immune to home price falls over the next year …
While home prices have been falling across the country, South Australia has continued to defy the downturn to see prices rise further in October to a new peak.
The PropTrack Home Price Index showed that national home prices recorded only a small decline in October. Prices have fallen persistently after peaking in March 2022 but fell just 0.06 per cent in October – the smallest decline since home prices peaked.
In Adelaide, home prices rose 0.12 per cent in October, taking them to a new peak and seeing Adelaide hold its spot as the strongest performing capital city over the past year. Regional South Australia also saw prices rise in the month, taking them to a new peak.
Relative affordability of Adelaide’s property market and lifestyle trends that arose during the pandemic are driving home price growth in the city.
But Adelaide will not be immune to home price falls over the next year, with interest rate increases the primary driver of home price falls. The RBA has raised rates 275 basis points in the past seven months, after raising the cash rate another 25 basis points this week.
The last time rates rose this fast was in 1994 when the Reserve Bank of Australia raised rates from 4.75 per cent to 7.5 per cent. That was delivered in larger increments resulting in a 275 basis point rise in only five months.
The sharp increase in interest rates is significantly constraining borrowing capacities and increasing borrowing costs.
Sharply higher borrowing costs are seeing new home loan commitments fall. This week, lending data from the ABS showed that the value of new lending for housing in September fell 8.2 per cent month-on-month to a two-year low as higher borrowing costs weigh on buyers. The decline has been more pronounced for owner-occupier buyers, with new loan commitments falling 9.3 per cent month-on-month, the largest monthly fall in at least two decades.
An owner occupier borrower with a loan-to-value ratio of 80 per cent based on the median home value in Adelaide, $650,000, will see their monthly repayments climb a further $78 after Tuesday’s hike, following a significant increase already this year.
Although price falls moderated in October, the RBA is set to continue raising interest rates, and on Tuesday raised their inflation forecast to hit 8 per cent this year, a new 32 year high and remaining above the target band into 2024.
This indicates that although the slower pace of rate rises may be maintained, they may be hiking for a longer period.
Rising interest rates not only increase repayments but reduce the amount prospective buyers can borrow. Now the cash rate is sitting at 2.85 per cent, maximum borrowing capacities have dropped by more than 20 per cent.
The reduction in borrowing capacities will push prices further down, though Adelaide is expected to hold up relatively well compared to other capital cities.
Eleanor Creagh is senior economist for PropTrack
Originally published as The rise of rates set to bite Adelaide buyers