Rising interest rates could slash house prices by 15%: RBA

Louis Christopher, managing director of SQM Research, said a 15% drop in prices was possible with a 2 percentage point increase, but only if inflation remained below 5%. Otherwise, a correction was unlikely.

The RBA’s half-year financial stability review released on Friday suggested that most borrowers could comfortably take the hit from rising mortgage repayments, even if the rising cost of living added risk.

Hit the feeling

NAB director of economics and markets Tapas Strickland said a 15% drop in house prices is unlikely to cause concern because the recent stock boom, including a rise in 22% in 2021, meant that 95% of borrowers were now at least 75 years old. percent of the equity in their home.

However, the impact on sentiment of such a price drop is not mentioned. “That would likely have wealth effects on household consumption as well as a sharp slowdown in activity in the housing market,” Strickland said.

New loans made when the debt was more than six times the borrower’s annual income increased to 24% in the December quarter. The RBA said this category of borrowers were at higher risk of mortgage default.

A 2 percentage point rise in interest rates, as economists and markets suggest, would double the share of households spending more than 30% of their income on borrowing costs to 20%, while a quarter of borrowers would face repayment increases of 30%. percent or more.

“About half of these borrowers have accumulated excess payment reserves equivalent to one year of their current minimum repayments, which could ease their transition to higher repayments,” the RBA said.

About two-thirds of borrowers who have locked in historic low interest rates during the pandemic will be forced to refinance by the end of 2023, and half of them will face higher borrowing costs up to 20%.

Despite the possible fall in house prices and rising borrowing costs, the central bank is optimistic about the financial outlook, saying household resilience has improved since the onset of COVID-19.

The median excess payment cushion for the 60% of borrowers with variable mortgages was increased to 21 months in February, and even with a 2 percentage point hike in interest rates, they would still have 19 months of advance.

The main risk to these buffers is the possibility that inflation will drive up the cost of living, forcing people to dip into cash to pay for living expenses.

More than 40% of variable rate borrowers are already making monthly repayments large enough to cover this level of rate increase, while another 20% are expected to face repayment increases of less than 20%.

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