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- Preface
- What impact will rising loan interest rates have on housing prices?
- Why do Australian banks raise loan rates before the central bank raises interest rates?
- Why did the bank lower the floating interest rate again?
- Conclusion
Foreword
CoreLogic data shows that the median house price of more than 300 urban areas in Australia has exceeded 1 million Australian dollars in just 7 months, including new entrants in Sydney and New South Walesremote areas. The largest number of people.
Between May and December last year, 311 suburbs had a median price of $1 million or more, taking the national total up 38.4 per cent to 1120.
A total of 77 Sydney suburbs have joined the ranks as demand pours out of the capital city regions, with the majority of new entrants on the Central Coast.
There are now 417 suburbs in Sydney where the median house price exceeds A$1 million.
Brisbane reaches the million-dollar mark. The number of suburbs has also increased dramatically, with 40 new areas entering the market, bringing the total to 91.
In Melbourne, 37 suburbs have joined the one million club, bringing the total to 221.
Adelaide has added 25 suburbs to take its total to 70, while the ACT has added 18 suburbs to take its total to 45.
Since the start of the pandemic, the share of million-dollar suburbs across Australia has surged, rising from 16.2% of all suburbs in Australia in March 2020 to 29.8% in December 2021.
In 2022, Australian home buyers may face a double-edged sword:
- house price growth continues to slow down;
- bank interest rates continue to rise.
What impact will rising loan interest rates have on housing prices?
House price appreciation is expected to continue to slow across much of Australia, a year after prices across the country rose by more than 22 per cent.
While first-time buyers will certainly be relieved that soaring house prices are easing, they will also be hit by higher loan repayments.
Because Australian banks may continue to raise fixed interest rates.
Mortgage Choice chief executive Susan Mitchell also believes bank fixed loan rates will continue to rise this year.
Mitchell said potential cash rate increases would be reflected in fixed rates and "banks will increase rates accordingly".
Realestate.com.au Economic Research Department Executive Manager Cameron Kusher said that the market environment has led to an economic slowdown and has nothing to do with interest rate changes. Any interest rate will suppress buyer activity.
"Prices are still rising but the rate of growth has slowed and our forecast is that even without a rate rise we will continue to see slower price growth in 2022."
While the RBA will not increase the cash rate in 2022, However, both fixed and floating interest rates offered by Australian commercial banks are subject to change.
"When interest rates rise, this will lead to slower price growth in the Sydney and national property markets."
Why do Australian banks raise lending rates before the central bank raises interest rates?
In fact, starting last October, all major banks, as well as many secondary banks, raised their fixed rates, some as many as four times in two months.
Although the Reserve Bank of Australia has repeatedly stated that it will not consider raising interest rates until 2024, and although it is unlikely to increase the cash rate in 2022, commercial banks do have the right to take independent action to increase interest rates.
The reason why Australian banks are gradually increasing fixed loan interest rates:
First of all, the current low interest rates are artificially depressed by a series of low-interest monetary policies of the Australian Central Bank.
Two initiatives that have been particularly effective are the Term Funding Facility, under which the Australian Reserve provides A$188 billion in loans to banks at a cost of 0.1% to 0.25% per annum, and the controversial yield curve targeting, which includes Australia The central bank buys two- and three-year bonds to keep their yields fixed at around 0.1%.
Both policies have now expired, meaning banks will have to pay more to lend money to households and businesses for two to three years.
This is why they are raising the 2-year and 3-year fixed rates.
The Australian Reserve Bank of Australia has lent A$188 billion to banks, coupled with deposit inflows from massive fiscal stimulus from federal and state governments, which means banks do not have to tap the wholesale bond market as much as they used to.
Banks are normalizing their funding needs as RBA funds will be repaid over the next few years and deposit inflows are likely to decline.
Banks' net interest margins are under pressure, so these costs will be passed on to customers in the form of higher lending rates and/or lower returns on deposits.
Any future financial market shocks will push up these financing costs.
When the Reserve Bank of Australia raises its cash rate, it raises the real borrowing rate.
If the banking system raises the fixed loan interest rate in advance, it can also respond more calmly to the policy changes of the Reserve Bank of Australia.
Moreover, economists generally believe that if inflation continues to be above the target range of 2% to 3%, interest rate hikes may happen sooner!
Why did the bank lower the floating interest rate again?
While Australian banks have raised fixed loan rates, they have also begun to reduce floating interest rates on home loans for owner-occupiers and investors.
We have already seen banks increase fixed rates from below 2% to 2.5% or more, while reducing variable rates to 2%.
And it is likely that banks will continue to do so until the majority of residential property borrowers again use floating rate products rather than fixed rate products.
As mentioned earlier, banks increased fixed interest rates and lowered floating interest rates in response to the end of the Reserve Bank of Australia's control of the yield curve in November last year.
At the same time, it is also to gain more share in the highly competitive mortgage market.
Although, Australian banks have room to further reduce floating interest rates this year.
But it is expected that as house price growth slows and competition for mortgages decreases, and wage growth and ongoing inflation remain around 2.5%, banks are likely to start raising floating rates.
Of course, this situation will not happen too soon in 2022. Judging from the current situation, it may happen as soon as near the end of 2022.
According to the results of a survey by the lender Mortgage Choice, there has been an increase in the number of customers choosing adjustable rate mortgages recently.
"About two-thirds of customers choose floating rates, and one-third choose fixed rates. Although this number is still high, it is much lower than six months ago."
Conclusion
There is no doubt that higher Interest rates affect how well people can repay their debt, and buyers may be more conservative in 2022 amid uncertainty about how long ultra-low interest rates will remain in place.
However, interest rates are only one factor that can affect the housing market.
Another important driver of housing prices is the supply of housing.
The relationship between supply and demand in the traditional sense is also more likely to affect the market.
So far, the real estate market has performed better than expected during the epidemic! What drives this round of real estate boom is the imbalance between supply and demand.
There is no doubt that this year will be a very interesting year. Australia’s official interest rates will still remain at historically low levels. It remains to be seen whether bank interest rate increases can dilute people’s enthusiasm for buying houses!
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