How will rising interest rates impact housing affordability?

With home loan interest rates on the rise, find out how housing affordability could be affected

31 May 2022|4 minute read

home with white picket fence

Do you have your eye on the property market? If you’re interested in getting your foot on the property ladder, you may be nervous about seeing interest rates climb.

In May the Reserve Bank of Australia (RBA) began raising the cash rate for the first time in over 11 years.

But it’s important to look at the bigger picture. How will rising rates impact housing affordability in Australia and how high are interest rates expected to go? We answer these questions and more in this article.

Why are Australia’s house prices so high?

Australia’s housing affordability has been rapidly declining since the 1980s.

Data shows the ratio of median dwelling values to household income had risen from 4.3 in December 2001, to 7.7 as of June 2021. The time taken to save a 20% deposit at the national level increased from 5.8 years to 10.2 years in the same period.

As of April 2022, the median national dwelling value is sitting at $748,635.

Several different factors have contributed to the rise in Australian house prices, including:

  • Decreasing interest rates over the past decade
  • Higher borrowing capacity due to lower repayments 
  • Greater availability of credit due to financial deregulation and more relaxed lending policies 
  • Demand outgrowing supply.

What will happen to housing affordability when home loan interest rates increase?

Australians have seen national housing prices increase by 35% since the start of the pandemic as a result of a low cash rate. It’s expected that as interest rates rise, growth in housing prices will start to stabilise.

With higher interest rates, borrowers will start to experience a reduced borrowing capacity. This means they won’t be able to borrow as much as they might have in previous years when the cash rate was at record lows.

As a result, there will likely be a slowdown in property demand, encouraging prices to ease. 

It’s important to remember that the cash rate and interest rates aren’t the only factors that affect housing affordability. 

Employment rates in Australia and household wealth also play an important role. Currently, the unemployment rate is sitting at a low 3.9%.  

Household wealth – the value of a household’s gross assets like superannuation, cash and term deposits, cars and financial assets – is on the rise. Data shows that household wealth increased by $590 billion, hitting an all-time high of $13.92 trillion in the third quarter of 2021. That’s a 20.2% increase from the year prior. 

While it’s difficult to predict how each of these factors will weigh on housing affordability, the trend of booming property prices is expected to fizzle out.

Why are home loan interest rates rising?

Interest rates are on the rise in 2022. While banks and lenders set their own interest rates, there are typically 3 factors that influence this decision:

  1. The cash rate, which is the interest rate on unsecured overnight loans between banks.
  2. To account for the rising costs of business
  3. What home loan interest rates other lenders are offering.

The cash rate affects interest rates on savings and credit products, such as home loans, car loans, personal loans, savings accounts and term deposits. 

A high cash rate is good for savers whereas a low cash rate is better for borrowers.

Interest rates typically reflect the cash rate, so if the cash rate goes up, the cost to borrow for banks and lenders also increases. As a result, lenders will often pass these growing costs on to customers by raising their rates on the products they offer, including home loans.

Why does the cash rate fluctuate?

The cash rate changes to reflect changes in Australia’s economy and support stable growth.

The RBA lowers the cash rate to encourage spending, which leads to higher economic activity and employment.

A lower cash rate supports household spending by increasing household cash flow. However, if this demand is strong, it can increase prices, leading to higher inflation.

In March, we saw the highest inflation surge in over 20 years at a rate of 5.1%. Additionally, unemployment rates are currently sitting at 3.9%, their lowest level since the 1970s.

The recent cash rate increase is the RBA’s response to skyrocketing inflation and shrinking unemployment rates to stabilise and normalise Australia’s economy.

What will happen to home loan repayments as interest rates increase?

As interest rates increase, so will home loan repayments.

If you’re on a variable rate home loan, you’ll likely see your interest rate increase in line with cash rate increases. Remember that lenders have the freedom to increase or decrease the interest rates they offer, regardless of the cash rate.

If you’re on a fixed rate home loan, your repayments won’t be affected by any changes until the end of your fixed term. When this period is up, you’ll likely see your interest rate revert to your lender’s standard variable rate.

Want a better idea of how your monthly repayments could increase? Check out the table below:

Loan amount Interest rate increase Annual repayment increase
$400,000 +0.25% +$624
$600,000 +0.25% +$948
$800,000 +0.25% +$1,260

How high is the cash rate expected to go?

Australians can expect further cash rate increases throughout 2022, with predictions stating the cash rate could reach 1% by the end of the year (0.9% higher than we started the year with) and 1.5% by mid-2023. 

When is the best time to enter the housing market and buy a home?

Despite predictions, it’s impossible to know for sure which way the housing market will go. However, there are certain factors that you can consider to help you make your decision:

  • Look at property pricing trends in the area you’re interested in. They can be a great indicator of whether the price of a house is fair or inflated.
  • Consider whether it’s a seller’s or buyer’s market. A buyer’s market means properties are likely more affordable as supply is greater than demand.
  • Consider your situation and if you’re financially prepared. It’s important to understand the costs involved in buying a property.
  • Know your borrowing power so you know your price range and don’t take on a mortgage that’s too difficult to manage
  • Get home loan pre-approval so you know how much a lender is likely to approve you for a home loan.

It can help to get expert advice on your property journey. Book an appointment with an Aussie Broker at no cost to you.

Book a chat with an Aussie Broker

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