Tags :AustraliaBusinessfinanceinterest ratesPROPERTYReal estateReserve Bank Australia
Chief economist at AMP Capital, Dr Shane Oliver, stated that although he sees house prices falling by 15% over the next 2 years, but not completely, he still analyzes the potential effects on a rate hike.
He mentions that the Australian housing market has been resilient over the past two decades, despite many economic factors.
Dr Oliver stated that “House Price Crash Calls” have been frequent over the past two decades. Despite periodic drops, the boom continued to grow despite these drops.
“So, the experience of the early 2000s warns against being too bearish. While some may consider a crash to be a 15 percent drop, others believe that prices will plummet 25 percent.
“Our assessment is that while a crash is possible, it is unlikely unless we see very aggressive rate hikes – say taking the cash rate to 4 or 5 per cent – or much higher unemployment, driving a sharp rise in defaults and forced property sales.”
Dr Oliver stated that there is a risk of a crash, as borrowers have not seen an increase in their interest rates in over 11 years.
The RBA increased rates to 4.75 % in October 2010 by 25 basis points.
He stated that the housing slump would have negative economic effects on the economy due to lower consumer spending and slower housing construction.
“The first was a major economic drag during 2017-19, when a 10% drop in average home prices caused a significant slowing down of consumer spending.”
The current official cash rate for Australia is 0.1%. This is a historic low.
As much recent commentary has noted, that’s a far cry from the actual interest rates borrowers are paying – but given the official cash rate impacts the bottom line of lenders it’s likely that any change will be passed on to customers.
According to four banks from Australia, the RBA will raise interest rates on June. This will kick off an “avalanche” of increases until the official cash rate is 1% at the end 2022 and 1.5% by mid-2023.
Analyse from financial comparison website Finder shows that a 75 basis point increase would cost an Average Borrower $31,175 per Year, if repayments are increased by $265 each month.
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Graham Cooke from Finder’s Head of Consumer Research stated that lenders already take rises in interest rates into account when calculating their margins.
“That’s why banks have increased rates across over 400 fixed rate home loan products over the last week – some by up to 75 basis points,” Mr Cooke said.
“This suggests that they could be anticipating not one, but two avalanche rates rises later in the year. It is not known when the question will finally be answered. International events could help determine this.
“Cash rate rises are like buses. They may take a while to arrive, but they eventually do.
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