Rising rates cut new home loan appetite

Soaring interest rates have halved the pace of home loan growth in just six months as the Reserve Bank’s war on inflation pulled the rug out from under the country’s once-booming housing market.

Owner-occupier home loans rose just 0.4 per cent in November in seasonally adjusted terms – half the 0.8 per cent monthly gain they posted in June – RBA figures published on Friday showed.

The sluggish increase that lifted the total stock of owner-occupier home loans to $1.44 billion reflected the surge in borrowing costs for buyers between June, when the cash rate was 0.85 per cent, and November, by which time it had jumped to 2.85 per cent.

Borrowing behaviour is closely linked to changing rates and the likely increase in the benchmark lending rate to 3.85 per cent – it stands at 3.1 per cent – will put further pressure on home loan demand, ANZ economists say.

“Housing finance has significantly further to fall,” economists Felicity Emmett and Adelaide Timbrell said in their last housing research note for 2022 at the end of November.

“Our forecast for the cash rate to reach 3.85 per cent equates to a reduction in borrowing capacity of more than 30 per cent. This reduced ability to pay will drive prices lower over coming months. Average new mortgage sizes are already 8 per cent off their highs.”

With housing prices expected to double the 8 per cent-plus declines they have already seen to date, the market is headed for its steepest downturn since the early 1980s, offering a reset in prices that creates opportunities for buyers who have the cash – if they are willing to accommodate further price falls.

Friday’s figures also showed a similar slowdown in borrowing by investors, with a 0.2 per cent monthly increase that was also half of the rate of growth it showed in June.

Housing values have also been falling as the volume of money chasing dwellings has shrunk.

Rising borrowing costs would “substantially” increase the share of household disposable income spent on mortgage repayments, a spending burden that would be made worse by a 7-per cent-plus annual inflation rate that was reducing the real value of wages and cutting spare cash flow for households, the ANZ economists said.

“Arrears are likely to rise after interest rates peak (Q2 2023) and the bulk of super-cheap fixed rates expire (Q2–Q3 2023),” they said.

Even so, households were well-placed to meet the higher costs, in part because of low unemployment rates, they said.

“By the end of 2023, 62 per cent of current fixed loans will have expired. The rate of non-performing mortgages at the start of the hiking cycle was less than 1 per cent, and ongoing low unemployment will help to limit the rise.”

Resource: AFR