Emerging Economics Series: Where to now for Australian housing?

In the wake of the pandemic disruption, an era of declining affordability and ongoing supply challenges for both owner occupiers and investors, we now have the shock return of rampant inflation and the first sustained rising interest rate cycle for nearly two decades.

“This is certainly the first time in my role as a market analyst, that I've seen such significant and successive rate rises and how the market is reacting to that.” - Eliza Owen

“The normalisation of interest rates and the way that inflation is dominating not just Australia's economic narrative but the global economic narrative, this is certainly the first time in my role as a market analyst that I've seen such significant and successive rate rises and how the market is reacting to that,” says Owen, CoreLogic’s head of Australian Research.

“We haven't seen inflation this high since the early nineties so the interaction of that with the housing market and how the RBA (Reserve Bank of Australia) is trying to combat it and the downward pressure it's putting on housing is pretty extraordinary.”

Owen notes there is a long-established relationship between rising interest rates and falling property prices and that pattern is being repeated in the current cycle.

“As interest rates have risen (that's) triggered price falls,” she explained on ANZ’s Emerging Economics podcast series.

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John Campbell, ANZ’s General Manager of Home Loans, says the extended cycle of ultra-low interest rates, amplified by emergency monetary policies during the pandemic, drove an historic shift towards fixed rate home loans in Australia – which is now unwinding as rates rise.

“This very low-rate environment … has presented a really great opportunity for borrowers to fix their home loans,” Campbell said.

“At one point ANZ had a two-year fixed rate in market of 1.94 per cent and not surprisingly by the middle of 2021 roughly 40 per cent of all applications that we received were for the fixed rate product.”

Historically demand was in the 12 to 15 per cent range, he added. Now, with rising rates forecast of mid to longer term to combat inflation, variable rate loans are cheaper and so demand for fixed rates is “only sort of low single digit level of applications”.

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While rising rates and falling property prices will play on the macro-economy – as indeed the RBA intends – Campbell is comfortable most borrowers are well shielded against economic hardship.

He notes while there is concern around those whose ultra-low fixed rates are about to roll off, buffers have been built in by lenders.

“We don't just look at the fixed rate plus the buffer, we actually look at the rate that they will roll off onto - plus a buffer,” Campbell says. Moreover, during the pandemic with discretionary spending restricted and interest rates at record lows, a very high proportion of borrowers have built up higher savings and paid off loans or lifted offset balances.

“There could be a segment or a portion who have borrowed recently and borrowed to maximum. We will have to watch that very closely. But nothing to date yet.”

The current cycle has also seen a rise in rental yields and Owen expects that to persist.

“What's really unique … is that while property values have fallen, rent values have continued to rise and they've continued to rise quite strongly,” she says.

Rising rents have a feedback impact as the cost of renting feeds into inflation – and hence interest rates.

“That unique trend in the rental market really comes from several factors, the first of which is people spreading out through COVID,” Owen explains.

“The average number of people per household fell quite notably with the onset of COVID - so basically people wanting a home office instead of a housemate in the second bedroom.

“That increases domestic demand for rentals. We're seeing now wage increases, more bonuses being given out as companies try to attract and retain talent, so that income growth is supporting growth in the rental market as well.

“And now we're also seeing the return of overseas migrants to Australia, gradually as we open up our borders and loosen our COVID travel restrictions. And when overseas arrivals first come to Australia, their housing demand tends to be skewed to rentals in big capital cities.”

Listen to the podcasts to learn more about this extraordinary period in the Australian mortgage market and what the outlook is.

John: https://soundcloud.com/user-782901756/anz-affluent-podcast-s2-john

Eliza: https://soundcloud.com/user-782901756/anz-affluent-podcast-s2-eliza

Andrew Cornell is the Managing Editor at bluenotes