Real estate Sydney, Melbourne: Huge myth about rising interest debunked

As interest rates started to rise this year, many Australians thought this might be their chance to take a breather – but all is not as it seems.

As interest rates began to rise this year, many Australians worried about the impact the move to blunt the effects of rising inflation would have on them.

Australians with large home loans were among the most affected, but there were also key demographic groups who were seen as the winners of the new normal of rising rates.

Pensioners with big savings were among them, but it was a battered generation of young Australians looking to get a foothold in the housing market who saw the RBA’s decision in the most positive light.

They had been left behind as house prices continued to soar to astronomical levels – slipping further and further out of reach over time.

The RBA’s rate hikes offered a glimmer of hope that house prices would come down; and we are already starting to see real estate prices fall.

House prices nationwide fell 0.1% in May, the first monthly drop since September 2020. Now experts warn they could fall 20% in Australia over the next 18 months .

However, it may not be the big win some young Australians think it is.

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Housing affordability is deteriorating

In a bombshell report, analysts at Moody’s Investors Service said that even if house prices fell by more than 20%, it would not solve the country’s housing affordability crisis.

In fact, they say it would make the situation even worse, as higher interest rates will make it harder for new buyers to meet mortgage repayments, even on much cheaper homes.

They said in January the average two-earner Australian household needed 25.7% of their monthly income to meet new mortgage payments. By May, that figure had risen to 26.8% and they expect it to continue to rise.

If we talk about the two major cities, Sydney and Melbourne, this figure becomes even more worrying. Average households in Sydney needed 37% of their income to repay their loans. In Melbourne, they needed 29.8%, according to the research.

According to Moody’s analysts, affordability will continue to decline despite falling house prices, as rising interest rates will lead to higher mortgage repayments.

“We expect house prices to decline over the remainder of this year and into 2023 as rising interest rates weigh on housing market sentiment,” they said.

“Based on our assessment of different housing price and interest rate scenarios, we expect prices not to decline as housing affordability improves as interest rates improve. interest is increasing this year.”

Moody’s modeling shows that if the RBA raises the cash rate to 2.85% and house prices fall by around 10%, housing affordability will continue to deteriorate.

“If the RBA raises the cash rate to 2.85% this year, our modeling shows that housing affordability will continue to deteriorate unless house prices fall by around 22%, a significantly larger drop. than we currently expect by the end of this year,” Moody’s said.

Meanwhile, ANZ has predicted the cash rate to hit 2.6% early next year, which the bank’s economists say will drive house prices down by 5% in 2022 and by 10% more next year.

However, Moody’s warned that even if the spot rate ended the year at 2.35%, house prices would have to drop 22% to see even a tiny improvement in affordability.

RBA chief to speak amid rising inflation

Reserve Bank Governor Philip Lowe will give a lecture today entitled “Inflation and Monetary Policy” at the American Chamber of Commerce in Australia.

He is expected to talk about the comments he made in a rare TV interview last week on ABC 7:30 a.m. in which he said the bank would do whatever it takes to bring inflation back to the RBA’s target range of 2-3%.

In this interview, he predicted that inflation would reach 7% by Christmas and would not start falling until the first quarter of next year, while the cash rate would hit 2.5%.

“I think Australians have to…be prepared for higher interest rates,” Dr Lowe said.

“We had emergencies during the pandemic, I think it was the right thing to do, but the emergency is over. And it’s time to remove the emergency settings and move on to more normal monetary policy settings.

Dr Lowe said he thought it was ‘reasonable for interest rates to reach … the cash rate to reach 2.5% at some point’.

He added that the RBA would do “what is necessary” to tackle rising inflation.

“It’s not clear at this time how high interest rates will have to go to get this,” Dr Lowe said.

“I am convinced that inflation will come down over time, but we will need to have higher interest rates to achieve this result.”

Read related topics:Cost of livingReserve Bank

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