More hikes could hit house prices hard

Property prices could fall further and faster should interest rates continue to rise sharply well ahead of the 2024 guidance given to homeowners by the Reserve Bank just six months ago.

Jonathon Burrowes, Nina Clarke and Barney at their home in Red Hill, Brisbane. The interest rate rise means they plan to cut back on splurges. Picture: Lyndon Mechielsen / The Australian

Property prices could fall further and faster should interest rates continue to rise sharply well ahead of the 2024 guidance given to homeowners by the Reserve Bank just six months ago.

Housing values have remained precariously balanced through first quarter of the year as the pandemic boom ran out of steam ahead of Reserve Bank of Australia’s 25 basis point interest rate rise on Tuesday.

Not only was the increase larger than many market economists had expected, it occurred far earlier than the RBA hinted at the end of 2021, due to strong inflation levels and low unemployment.

PropTrack senior economist Paul Ryan said the impact of rate movements would be gradual. The number of borrowers on fixed mortgages is more than double the long term average of 15 per cent, many taking advantage of ultra-low rates through the pandemic. About three-quarters of these are set to expire next year.

“It will spread out interest rate shocks,” Mr Ryan said. “Without a doubt, almost every mortgagee will struggle as they are forced to reassess their budgets.”

Reserve Bank governor Philip Lowe said the bank would continue to monitor the nation’s high levels of household indebtedness and the fact many homeowners – more than a million on the Commonwealth Bank’s count – have never experienced a rise in rates. But, given the robust household saving levels of recent years, he believes many are well placed.

Mr Ryan does not expect mortgage arrears or the number of distressed sales to increase.

Canstar analysis suggests Tuesday’s rate rise will add a further $68 to the monthly cost of a mortgage based on the average variable cost. Repayments would jump by $250 per month once the cash rate moves by 1 per cent.

In the inner-city streets of Brisbane, homeowners Jonathon Burrowes and Nina Clarke, aged 35 and 27, are feeling a little regret.

Repayments on the couple’s Red Hill home are about to rise by about $114 per month should their lender Bankwest pass on the 25 basis point hike to their current variable rate of 2.23 per cent. They had looked at fixing their rates in February and were advised to hold off by their broker on the basis the newlyweds now want to renovate after five years of ownership.

“Our house is our priority,” Ms Clarke said. “If rates rise that much, we will cut back on splurges like travelling and renovating. If anything, the raise today has made us more conscious to put money in our offset account in case things start getting a little bit tight.”

Managing director of data firm SQM Research Louis Christopher slammed the central bank’s slow response to updating its messaging to homeowners, warning that a rise of 1 percentage point by September would see prices slip by up to 8 per cent and 7 per cent in Sydney and Melbourne respectively and cause Brisbane to start sliding backwards by the end of the year.

“The problem in all this is the chances of the RBA managing a soft landing of the economy is low,” Mr Christopher said. “They will either undershoot on rate rises and increase inflation or go too hard.”