The Reserve Bank of Australia (RBA) has left rates on hold for August 2018 at 1.5% yet again. In fact, it’s been almost 2-years since the RBA have moved on the official cash rate. Though, economists predict that rate hikes may occur in the closing months of 2019, providing that inflation warrants the move. So, the question on many people’s lips is, “How will home values handle a rate rise?”
Australian Home Values
Australian home values have continued to fall since September 2017, according to CoreLogic Data, with property now 1.3% lower than their peak. Although, these declines are small when compared to the spike in home values during peak times. Even with the decline in home prices, the Australian housing market is still 32.4% higher in value than 5-years-ago.
A growth of over 30% in 5-years is far greater than any other return, and it signifies the level of wealth creation experienced by many nationally. But, for those who have only recently bought property, the decline in property values may mean that they now have little or no equity in their home and that they have lost investment value short term.
In relation to home value, CoreLogic’s June quarter results show that dwelling prices nationally fell by 0.8% over the quarter. The largest declines over the quarter occurred in Melbourne with a drop of -1.4% in value, Sydney followed with a decline of -0.9%, then Darwin at -0.8% and Perth with -0.7%.
However, not all Australian homes fell in value. Hobart homes rose in value by 2.3% over the quarter, and Adelaide property increased by 0.9%, followed by Brisbane with a 0.3% increase and Canberra with 0.2%.
The RBA and Australian Home Values
The RBA’s role is to offer stability to the Australian currency, to maintain levels of full-time employment and to encourage economic prosperity for Australian people. To ensure these occur, the RBA’s policies centre around a medium-term inflation target of 2 to 3%. This level of inflation is often a precondition for the promotion of a sustainable economy and also employment.
However, the Reserve does not guarantee solvency for financial institutions. Also, the Bank does not provide support for insolvent institutions. Instead, the Reserve provides liquidity to the system and also manages financial predicaments.
Australian home values are pivotal to the management of the Australian economy as they link directly to household finance and the maintenance of family financial stability. With Australian debt levels escalating, the Reserve and other financial regulators have worked closely to mitigate the risk that has risen from the level of household borrowing.
To maintain financial stability, the Australian Prudential Regulation Authority (APRA), which works closely with the RBA, introduced tighter lending conditions. This action saw fewer investors buying, which, in turn, resulted in the prices of homes across Australia falling. This fall is despite APRA lifting its 10% speed limit for lenders mid-year in 2018.
But, even though APRA’s investor growth limitations have worked, allowing the RBA to keep rates low and a housing boom contained, this doesn’t mean that rates won’t independently rise. In fact, there’s talk that lenders will have no choice but to raise rates to maintain control over escalating costs.
What’s On the Lending Radar?
Lenders typically borrow their money off-shore from countries such as the US and Canada. So, when these countries raise their rates, which they’ve recently done, then the cost to borrow funds short-term will increase.
But, here’s the kicker: these short-term funding costs are around GFC levels. Now, when you also consider that investor finance has fallen by almost $2.3bn a month, the lowest in approximately five years, then it’s highly likely that lenders will need to recoup costs.
However, the likelihood that lenders would raise rates significantly is low. Why? Well, according to survey data, the high level of Australian household debt is majoritively owned by higher-income middle-aged people, with stable incomes and financial buffers in place, and also lower-income households, with greater debt than income. Although, households assets are said to be, on average, around five times the value of household debt, with assets exceeding the value of debt for the majority of households. But, most of these assets are difficult to liquify due to them being either property or superannuation.
So, what’s the bottom line? The RBA suggest that households with greater debt levels are more susceptible to economic shock, and, this, in turn, may affect economic outcomes resulting in less consumption. Plus, the RBA has noted that rises in rates reduces the disposable income of households, with households then less inclined to borrow, which will also affect Australian housing values with supply outweighing demand. Given these outcomes, the RBA will be closely monitoring household financial balance.
Are you looking to beat rate rise by securing a more competitive home loan? If you said YES, then it’s time to discuss your circumstances with a mortgage broker. We have access to 100’s of products across a panel of multiple lenders, so we could help find the right mortgage for you.