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  • Writer's pictureCOMPASS

Interest Rates Up House Prices Down

Here’s a link to a good article written by Michael Janda (ABC’s business reporter) dated 8/4/22. It relates to the Reserve Bank’s modelling on the relationship between falling house prices and rising interest rates.

The modelling based on the historical relationship between these two, suggests that overall residential house prices could fall 15% if interest rates rise by 2%. Here's some takeaway points from this article :-

  • Due to a past environment of historical low interest rates many home borrowers took advantage of this to get well ahead of required loan payments , creating a buffer against future rate rises. This also had the effect of building equity faster, and property market price increases added to increased equity.

  • Only an estimated 5% of borrowers are now in a position where they have less than 25% equity in their properties meaning that property values would need to fall by that percentage to place that 5% in a negative equity position.

  • If interest rates rise by 2%, one in five borrowers would see their minimum payments rise by 40% or more. These are borrowers that have most recently entered the property market at high loan to security rate levels , and have limited savings or in advance loan payment buffers.

  • Falling real wages may occur if wages growth cannot keep pace with inflation, which would mean borrowers having to dip into savings or in advance loan payments to supplement day to day living needs.

  • Lender credit standards need to be maintained at a high level given the rising interest rate and future fall in property values .

  • High debt to income ratios where borrowers are borrowing more than six times their gross annual income are at higher risk , not only in their ability to meet loan payments as interest rates rise, but also from a macroeconomic position because it restricts household spending which is a major contributor to economic growth.

  • 15% of renters are vulnerable to financial stress , spending more than 30% of their income on rent, and having less than one month of available disposable savings.

All of the above leads me to one conclusion . Apart from reviewing your home loan facilities, it is now more than ever so very important that a realistic budget is put in place for borrowers and indeed all households . The budget should be duplicated with the second one focused on two additional aspects. Build in an increase home loan payment assuming 2% to 3% interest rate increase on all home loans. In addition add 3% for inflation to all budget expenses. We have moved from an environment of low inflation and low interest rates, and we need to be prepared for that.

If you have any questions please contact Michael on 02 6583 2211.

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