Housing affordability likely to move back onto centre stage.

The decision from the Reserve Bank to raise interest rates by a further 25 basis points has been met with mixed reactions.  First home buyers and low income households are going to feel the pinch the most, as are those mortgage holders that managed to stretch their budgets too thinly without allowing for the time when interest rates inevitably moved away from their historic lows.

 Other parts of the market aren’t as likely to be affected – those who have budgeted prudently will have built a more normal rate of mortgage payments into their financial plans and investors are probably thankful for the rate rise as it means less competition in the market place.

If the financial markets are anything to go by, the tightening cycle of interest rate rises has some way to go.  By February next year financial markets are suggesting the cash rate will be at 4.0 percent and by June the yield curve suggests a cash rate of about 4.75 percent.  If the banks move in line with the cash rate, this means the average standard variable rate will be about 6.8 percent in February and 7.55 percent in June.  Under the same financial market guidance the cash rate is likely to reach 5.5 percent in February 2011 equating to a variable rate of 8.3 percent (click here to see the cash rate futures yield curve).  A cash rate of 5.5 percent is widely considered to be at the outside limit of a ‘neutral’ stance from the Reserve Bank.

To provide some relativity, over the last ten years variable mortgage rates have averaged 7.26 percent which highlights the fact that mortgage rates are still well below average and are likely to remain so well into 2010.

Variable mortgage rate last ten years

Even with the latest rate rise, monthly mortgage payments are still, on average, about 25 to 30 percent lower than what they were in August last year when variable mortgage rates were averaging 9.6 percent.  

The spotlight over the coming months will be on housing affordability.  We anticipate consistent modest gains in home values and rental rates over the coming year, which, together with mortgage rates returning to more normal levels, will result in an erosion of housing affordability.  The latest figures from Fujitsu Consulting suggest the number of people who default on their mortgage payments will almost double from 25,000 today to 40,000 by the end of 2010.

Rental pressure will once again gather pace as more potential buyers are financially blocked from purchasing or prefer to rent and as a consequence rental yields for investors will improve. 

Unfortunately there is no rapid ‘fix’ to housing affordability; the situation isn’t likely to improve until we see substantial improvements in the number of new housing starts – a scenario that doesn’t appear to be on the cards any time soon.

About Tim Lawless

Tim heads up the RP Data research and analytics team, analysing real estate markets, demographics and economic trends across Australia

Connect with CoreLogic

Enter your email address to subscribe to our e-newsletter, and have new posts delivered via email. You can also connect with CoreLogic on social media.

No comments yet.

Leave a Reply

Notify me of followup comments via e-mail. You can also subscribe without commenting.