Historically low mortgage rates played a central role in the rebound in the housing market

Record mortgage rates and a forecast that interest rates will remain low for a long time have played a central role in Australia’s economic recovery and rebounding real estate markets.

Although Australia’s economic recovery has beaten expectations and appears to be sailing out of budget support without too many problems so far, spot and short-term mortgage rates are likely to remain at their all-time lows for a while. long period. This outlook for continued low rates is due to an expectation that labor markets will not tighten enough to push wage growth to a level conducive to inflation returning to the target range of 2-3% of here at least 2024.

The annual change in headline inflation followed at just 1.1% in March, and wage growth was only 1.5% over the year until March.

Although the cash rate is expected to remain at historically low levels, many lenders have already raised their long-term fixed rates slightly, reflecting an expectation of an increase in the cost of funding. With the RBA’s $ 200 billion term finance facility expiring at the end of June, we may see further upward pressure on longer-term fixed rates as funding costs rise. banking are normalized.

As Australian home values ​​have experienced an eighth consecutive month of growth, hitting new highs every month in 2021, the RBA will likely keep a close eye on housing market trends or, more importantly, the lending behaviors that support the market activity. The pace of house price appreciation has slowed a bit since growth rates hit a 32-year high in March, but with domestic home values ​​rising 2.2% in May, the pace of capital gains remains unsustainable.

Combined with deteriorating affordability for those who do not yet own a home (due to housing prices rising significantly faster than incomes) and higher supply as the surge in housing approvals transforms In housing completed, one would expect fixed mortgage rates to rise slightly faster than income. another factor that is gradually taking a bit of heat in the housing market.

In a positive sense, the rapid appreciation in home values ​​has increased household wealth and has likely been a key factor in improving spending behavior that has supported the economic recovery.

However, the recent increase in investor loans and the potential for higher household debt could be of growing concern as borrowers stretch their budgets to access the housing market.

In March, the value of mortgage loans to investors grew at the fastest rate since July 2003. Investors remain under-represented in the market, accounting for around 26% of mortgage demand, but so investor activity continues to grow at this rate and the activity of first-time home buyers continues to slow, this segment of the market could quickly reach above-average levels.

In addition, throughout the December quarter, the proportion of mortgages issued with high loan-to-income ratios and high debt-to-income ratios increased, as did interest-only loans and loans to borrowers with loan ratios. -high valuation. Given the sharper increase in investment loans since the December quarter, it is possible that the proportion of these types of loans generally considered to be “riskier” has already increased.

If the RBA, along with the broader Council of Financial Regulators, sees speculative activity increase more significantly or if lending standards deteriorate, there is a good chance that tighter credit controls will be implemented by APRA. We know from previous macroprudential policy cycles that tighter credit conditions would likely have an immediate dampening effect on housing market conditions.

During the month of May, the RBNZ forecast indicated that interest rates could start to rise from the end of 2022. The US central bank also hinted at a potential reduction in quantitative easing down the line. These statements can be seen as relatively hawkish and have implications for Australian monetary policy. However, inflation has moved significantly upward in these countries. Additionally, recent events in Melbourne have highlighted the continued vulnerability of the economic recovery to COVID-19 outbreaks. Even with a well-contained COVID and higher immunization levels, any unwinding of current monetary policy parameters is likely to be extremely gradual and carefully communicated, so as not to shock demand.

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