If you’re currently or potentially a party to a property settlement, the property in question may not be worth what it used to be. This article in the Australian Financial Review highlights the downward pressure on house prices in Australia as a result of recent and upcoming interest rate rises. Time to update your balance sheet!

House price falls to spread nationwide as rates rise

Nila Sweeney

Published June 7, 2022 on AFR.com

House price falls will accelerate across Sydney and Melbourne and could even spread to other capitals including Brisbane and Adelaide where prices are still rising, after the Reserve Bank raised interest rates by 0.5 per cent, experts say.

Recent homeowners, especially those who have taken low deposit loans are also at risk of falling into mortgage stress in the next three months as interest rates continue to rise.

House price falls are poised to accelerate after a larger-than-expected rate rise.

“The higher-than-expected rate rise is now getting beyond our assumptions,” said Louis Christopher, SQM Research managing director.

“Therefore we can only conclude that there is now a downside risk over and above our forecast housing price falls of 7 per cent to 8 per cent for this year.

“We’re still expecting an orderly decline in Sydney and Melbourne which is likely now to spread to other cities in terms of housing price changes. I think prices will start to fall in Adelaide and Brisbane in the second half of the year.”

Shane Oliver, AMP Capital chief economist said the rate rise will crush confidence and accentuate the weakness in the housing market.

“Property owners who want to get in now obviously will have their expectations dashed because as rates go higher, it gets more and more difficult to borrow the amount they need,” he said.

“Probably the most pain will be felt by vendors who want to sell their property now as fewer buyers enter the market.”

Painful for those who got in recently

Recent borrowers who have high debt levels were at risk of owing more than their home values and could face difficulties in servicing their mortgages, Dr Oliver said.

“Those who took fixed rate last year may not feel the pinch yet, but still it’s going to be really painful for those who got in recently,” he said.

“I think there’s a group of around 25 per cent to 30 per cent of borrowers who will see a substantial rise in mortgage repayments, particularly recent borrowers, and they’re probably more at risk. They’re probably facing mortgage stress in the next three to six months.

“It will take a little bit longer to show up through forced selling, depending on how quickly the Reserve Bank raises interest rates, but some will be starting to worry about it.”

Dr Oliver still expects house prices to fall between 10 per cent and 15 per cent peak to trough, but the bulk of the decline could occur in the next few months.

“The risk is that price falls occur more sharply and that it will come earlier than I was expecting,” he said.

“Prices nationally look like they peaked in May and looks like we’re seeing a sharper, earlier decline in prices which could prove to be a lot faster than the decline we saw in 2017.”

The shock of the larger than expected rate hike could drag demand and housing activity even lower, said Tim Lawless, CoreLogic research director.

“Considering confidence and housing activity are highly correlated, a further dip in sentiment would likely be accompanied by further downwards pressure on housing activity and housing prices,” he said.

“Beyond that, higher interest rates will further erode borrowing capacity and impact prospective borrowers on their serviceability assessments, which would also have a negative impact on housing demand.”

Settled sales estimates from CoreLogic indicate dwelling sales over the three months to the end of May were down by 19 per cent compared to a year ago.

CBA have revised their cash rate forecast and now expect a further 0.5 per cent rise in July, followed by 0.25 per cent increase in August, September and November that will see the cash rate target at 2.10 per cent by the end of the 2022.

This article originally appeared in the Australian Financial Review: https://www.afr.com/property/residential/house-price-falls-to-spread-nationwide-as-rates-rise-20220607-p5armd