Will rising interest rates crash the housing market?

Interest rates around Australia are expected to continue to rise, raising the cost of loan repayments and increasing the pressure on many household budgets. But could these rate hikes also bring Australia’s housing market to a screeching halt?

How high will interest rates rise? 

The RBA has chosen to hike the cash rate to help oppose inflation, which is expected to peak at 7 per cent by the end of 2022. While there are also international factors and supply chain issues in play, the higher cash rate should “help establish a more sustainable balance between the demand for and the supply of goods and services.”

In a recent speech, RBA governor Philip Lowe suggested that with the RBA’s inflation target at between 2 and 3 per cent, “this suggests that the neutral nominal rate is at least 2½ per cent.” Considering that following the July 2022 rate hike the cash rate is at just 1.35 per cent, that would mean almost doubling the current cash rate. However, governor Lowe added that the RBA Board “is determined to do what is necessary to return inflation to 2–3 per cent.”

Economists from the big banks have similar expectations, with most forecasting multiple hikes over the coming months, with respites only in December and January (when the RBA does not meet). The most recent forecasts from ANZ are for the cash rate to hit 3.35 per cent before the end of the year.

How can the cash rate affect house prices? 

As the rising cash rate drives fixed and variable home loan interest rates skyward, it may become much harder for Australians to afford larger home loan repayments.

This means it may be harder to borrow the large sums required to afford the high property prices in some areas of Australia, such as in parts of Sydney and Melbourne. With everyday Australians (especially first home buyers) already struggling with cost-of-living pressures, a super-sized home loan could be the last thing they need.

With fewer Australians able to afford high property prices, vendors may need to start accepting lower offers on homes and investment properties or take their properties off the market altogether. Fewer sales at lower prices may see average property values in some areas decline. This could potentially start affecting existing homeowners looking to refinance – if they only bought recently and property values fall in their area, they may no longer have enough equity available to refinance, at least without paying Lender’s Mortgage Insurance (LMI).

These effects are reportedly already being felt in some areas, CoreLogic’s latest national Home Value Index showing values falling for a second month in a row, down 0.6% in June 2022. Additionally, dwelling prices in the two biggest housing markets were found to be down in June 2022, with Sydney dwelling prices falling by 1.6% and by 1.1% in Melbourne.

Commonwealth Bank’s head of Australian economics, Gareth Aird, has forecast that nationally home prices may fall around 15% by the end of 2023 as a result of cash rate hikes.

Will housing crash? 

The impact of cash rate hikes on Australia’s housing market may not be easy to predict with accuracy, due to the wide variety of different factors in play.

For example, RBA deputy governor, Michele Bullock, said in a recent speech that many Australian households are well-positioned to weather the storm of rising rates, due in part to having previously built up savings buffers, as well as stronger lending standards and higher levels of household equity. Additionally, the relative strength of the Australian economy and the low unemployment rate could indicate that people will have jobs to service their mortgages.

As new data on inflation and employment is released, this could change the outlook for the cash rate and the economy. Borrowers in a position where changes to their circumstances could put them at risk of defaulting on their mortgage may want to consider taking steps to prepare in case of a future recession.    

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