Australia’s red-hot property prices are unlikely to be immediately smashed as soon as the Reserve Bank of Australia (RBA) hikes interest rates, with experts warning there will be a “lag” until borrowers seen a downturn in growth.
Property data firm CoreLogic analysed the correlation between Australia’s property prices and interest rates, finding that it may be as long as twelve months before a change in rates puts downwards pressure on prices.
Currently, the RBA has maintained that while it is “plausible” interest rates will rise in 2022, the central bank is “prepared to be patient” and will wait for inflation and wages to rise and settle.
“When the cash rate rises, housing values could experience some downwards pressure,” writes Eliza Owen and Tim Lawless of CoreLogic.
“Testing the correlation between the cash rate and the national CoreLogic Home Value Index between January 2002 and January 2022 shows an inverse correlation of 84.7 per cent.
“Lagging the cash rate by up to a year increases the strength of the correlation, which suggests it takes some time for movements in the cash rate to have their maximum effect on the property market.”
While many have predicted that a hike in the cash rate will blunt the growth of house prices, very few are saying there will be any retreat from current values.
Currently the typical Australian home is growing its value at the fastest rate since June 1989, adding 22.4 per cent or more than $130,000 in just twelve months.
If interest rates were to be hiked multiple times in 2022 – a realistic forecast put forward by some of the big banks including Westpac – a person earning $100,000 a year would see their maximum borrowing capacity fall by $31,900 to around $719,100.
A person on $150,000 a year would see theirs fall by $46,200 while a person on $200,000 a year would see theirs fall by $61,400.
The new estimates, calculated by RateCity.com.au, is based on a single person taking out a 30-year loan on the average new customer variable rate with no other debts.
This is an estimate as borrowing capacity depends on people’s personal circumstances and varies between lenders.
Given many have maxed out their borrowing capacity to enter the market, Ms Owen and Mr Lawless warn that borrowers are likely to be highly sensitive to any change to the cost of their repayments.
“It is reasonable to expect households would be more sensitive to the cost of debt when household debt levels are elevated – as they are currently,” the pair write.
“RBA data to September 2021 showed the ratio of housing debt to household income at reached a record high of 140.5 per cent.
“With this in mind, households are likely to be more sensitive to movements in the cost of debt than they have been in the past.”