The Reserve Bank of Australia will trial its own digital currency as part of a research project to evaluate the future of Central Bank Digital Currencies (CBDC) in Australia.
Key points:
The RBA will launch a pilot central bank digital currency (CBDC) as part of a research project
The CBDC will be a real claim on the Reserve Bank, meaning it will be recognized as legal currency
The research project is expected to last for a year and assess the possible uses for a CBDC and challenges that need to be addressed
Unlike well known cryptocurrencies such as Bitcoin and Ether, which were created by private entities or individuals, a CBDC is issued and controlled by the central bank just like cash and electronic stores of sovereign currency sitting in bank accounts.
The research project the RBA is undertaking in collaboration with the Digital Finance Cooperative Research Center (DFCRC) will focus on the uses for, and potential economic benefits of, a CBDC.
“The project, which is expected to take about a year to complete, will involve the development of a limited-scale CBDC pilot that will operate in a ring-fenced environment for a period of time and is intended to involve a pilot CBDC that is a real claim on the Reserve Bank,” the RBA noted in a media release.
“Interested industry participants will be invited to develop specific use cases that demonstrate how a CBDC could be used to provide innovative and value-added payment and settlement services to households and businesses.”
RBA deputy governor Michelle Bullock said this project is “an important step” on the path to a potential Australian CBDC.
“We are looking forward to engaging with a wide range of industry participants to better understand the potential benefits a CBDC could bring to Australia,” she said in a statement.
Dr Andreas Furche, the chief executive of the DFCRC which is undertaking the research project with the RBA, said the doubts around CBDCs are mainly focused on how useful they could actually be, and in what ways.
“CBDC is no longer a question of technological feasibility,” he argued.
“The key research questions now are what economic benefits a CBDC could enable, and how it could be designed to maximize those benefits.”
The Reserve Bank said Treasury is involved with the project, which will soon invite industry participants to pitch specific uses for a CBDC that might be selected for trials in the pilot.
The project will then help to understand some of the technological, legal and regulatory issues that arise from a CBDC.
A report on the results of the project is expected in about a year’s time.
Deep divisions are emerging among some of Australia’s leading bank economists on their outlook for interest rates and the Australian economy.
Key points:
The major banks are split on cash rate forecasts, with Westpac and ANZ tipping a peak of 3.35 per cent and CBA 2.6 per cent
Westpac’s chief economist warns inflation could get out of control if the RBA does not keep lifting rates decisively
CBA’s head of Australian economics is warning of recession and housing crash risks if the cash rate passes 3 per cent
In one camp are those, such as the economists at Westpac and ANZ, who believe that the cash rate target will pass 3 per cent before the end of this year.
Both are tipping the RBA’s benchmark official rate to peak at 3.35 per cent — it is currently 1.85 per cent — meaning interest rates would almost double from where they are, rising by another 1.5 percentage points over the next six months or so.
The cash rate target was just 0.1 per cent at the beginning of May.
In fact, Westpac’s chief economist Bill Evans is not only predicting the cash rate will get to 3.35 per cent, but arguing it must if the Reserve Bank is serious about bringing down inflation.
Westpac is expecting the cash rate to hit 3.35 per cent, but CBA thinks it will top out at 2.6 per cent before falling next year.(abcnews)
“The key reason why we insist that a sharper slowdown in demand is required in 2023 is that a much stronger set of demand conditions … runs the risk of resilient high inflationary expectations,” he wrote in response to the RBA’s Statement on Monetary Policy, released on Friday.
The Reserve Bank used market forecasts of a 3 per cent cash rate to underpin its latest economic forecasts, which did not have inflation falling back even to the top of its 2–3 per cent target range until the end of 2024.
Mr Evans said those forecasts showed that the RBA should raise rates more aggressively, even at the expense of slower economic growth — Westpac’s modeling tips annual economic growth of just 1 per cent next year if rates hit 3.35 per cent.
“Such an approach would give the bank the best chance of managing this difficult task of returning inflationary expectations to more normal levels and deflating the current ‘inflationary psychology’ which is now at risk of taking hold,” he said.
Too many rate rises could ‘take the economy backwards’
Then there is the other camp of economists, represented by the Commonwealth Bank and NAB among the big four, who cannot see the cash rate getting above 3 per cent in the near future.
“I don’t think it’s likely to happen because I think the Reserve Bank, once they get the cash rate to around their estimate of neutral [somewhere near 2.5 per cent]will want to pause and actually see how the economy’s responding to the rate hikes that they’ve delivered,” CBA’s head of Australian economics Gareth Aird told RN Breakfast.
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Is Australia at risk of a recession? – Monday Finance with Michael Janda
“They are putting through a lot of tightening in a very short amount of time and, if they continue to hike at the rate that they’re doing and just keep going all the way to 3 per cent and even above that level, they’ re not going to be able to actually assess the impact that those hikes are having on the economy in that in that amount of time.
“Now, it’s possible that they end up taking the cash rate to those levels, but I think if they do that, they’ll end up reversing gear in the not too distant future because … we have a highly indebted household sector in Australia and rate rises of that magnitude will just put too many households under stress and I think that will ultimately take the economy backwards.”
The Reserve Bank has recently changed its language slightly to emphasize that “it is not on a pre-set path”.
“The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labor market,” RBA governor Philip Lowe said after last week’s latest half-a-percentage-point rate rise .
Mr Aird is taking the RBA at his word and believes the economic data will soon give it reasons to stop raising rates.
“I think we’re going to see in the not-too-distant future that the economy is slowing down pretty materially, given how quickly they’ve taken the cash up right now,” he said.
Mr Aird bases that view in large part on CBA’s own in-house economic data, drawn from the millions of customers who bank with Australia’s largest financial institution.
“I think the RBA has tended to focus on aggregates whereas, internally, we look at disaggregated data,” he explained.
“What it indicates to us is that there’s a lot of households that will feel the impact of the rate hikes immediately. As a result of these rate hikes, they’ll have to adjust the way they’re spending money.
“That then has an impact on household consumption.”
AMP Capital’s chief economist Shane Oliver does not have access to the wealth of internal data at CBA but has observed other early indicators that the economy is losing steam.
“There is tentative evidence that this is starting to show up in slowing consumer spending with credit and debit card transactions looking like they are slowing, hotel and restaurant bookings looking like they are rolling over, and July retail sales implying now falling retail sales in real terms,” he wrote in a recent note.
Dr Oliver has the same 2.6-per-cent peak cash rate forecast as Gareth Aird, and for similar reasons.
“A rise in the cash rate to 3 per cent or more would push total mortgage repayments [i.e. interest and principal] to record highs relative to household income,” he observed, noting that the situation would be even worse for recent home buyers.
“Averages can be deceiving — a bit like having one arm in the freezer and one in the oven and saying on average you are okay.
“While RBA analysis shows that just over one-third of households with a variable rate mortgage will see no increase in their payments with a 3 per cent rise in interest rates, more than a third of all households with a mortgage – whether variable or fixed — will see a greater than 40 per cent increase (and much more so for those on fixed rates).
“Roughly speaking, this is about 1.3 million households.”
Risk of housing crash amid ‘forced sales’
Dr Oliver warned that these households are facing a triple whammy — rising rates, falling real wages and a decline in the value of their homes.
“[Rising mortgage repayments]at a time of falling real wages, will have a huge impact on spending in the economy and risk a significant rise in forced property sales,” he noted.
“Coming at a time when home prices are already falling rapidly due to the impact of rising rates on home buyer demand, it will only add to home price falls, which will weigh further on consumer spending.”
Even though the Reserve Bank does not have any mandate to target property prices, Gareth Aird agreed with Shane Oliver that it would be a major consideration, given the effect that a perceived fall in wealth is likely to have on consumer spending.
CBA’s forecast is for a major property market correction that risks turning into what market traders would generally define as a crash — where prices fall at least 20 per cent from their peak.
“We’re looking for around about 15 per cent peak to trough — that’s conditional on the cash rate getting to 2.6 per cent,” he said.
“If the RBA was to take the cash rate higher than that then we’d be forecasting a bigger fall in home prices.”
However, Mr Aird does not think that is likely.
“We’re actually thinking that rates will go down in the second half of next year, such is the weight that these higher rates will actually have on the household sector.”
Shane Oliver is also optimistic that the cash rate will not need to rise much further to tame inflation, as some of the biggest price rises stop of their own accord.
“Core inflation in the US is showing signs of having peaked and Australia appears to be following the US by about six months, pointing to a peak in inflation here later this year,” he argued.
“A return to more normal weather after the floods should also help lower local food prices.”
The difference between a 2.6 per cent cash rate and a 3.35 per cent cash rate is around $284 a month for someone with a 30-year $600,000 mortgage, so a lot of Australians with home loans will be barracking for Aird and Oliver in the battle of the forecasts.
The Reserve Bank has slashed its forecasts for economic growth as rate rises, house price falls and a souring global economy weigh on Australia’s outlook.
The bank has dramatically scaled back its forecasts for household consumption, which accounts for about 60 per cent of Australia’s economy.
“Higher consumer prices, rising interest rates and declining housing prices are expected to weigh on growth in private spending, at the same time as growth in public demand slows,” the bank noted in its latest Statement on Monetary Policy.
The bank slashed its consumption forecast for the middle of next year from 4.4 per cent to 2.8 per cent, echoing the results of surveys that show consumer sentiment approaching recessionary levels.
Higher interest rates are expected to be a major factor behind tightened belts, with the RBA basing its forecasts on an assumption that its cash rate would hit 3 per cent by the end of the year – up from 1.85 per cent currently – before falling back a little by the end of 2024.
It is important to note that this is not an RBA forecast for the cash rate, but an assumption based on market pricing and economist forecasts.
The outlook for Australia’s gross domestic product (GDP) has been cut by a full percentage point from around 4.2 per cent for December 2022 to 3.2 per cent.
Those cuts continue for the rest of the forecasting period, with the economy expected to grow just 1.75 per cent for the next two years.
Falling house prices, combined with the previous construction boom inspired by ultra-low interest rates and the previous government’s HomeBuilder grant, will result in dwelling investment falling sharply (-4.8 per cent) over 2024.
State and federal governments are also not expected to provide any assistance, with expectations that public spending will shrink next year.
Real wages to keep shrinking
Despite the slowdown in GDP growth, the RBA expects the jobs market to remain strong.
It is now predicting that unemployment will bottom out at about 3.25 per cent later this year before gradually creeping back up to 4 per cent by the end of 2024, as economic growth slows and migration flows start to ease some labor shortages.
Despite this leading to a modest pick-up in wage rises to about 3.5 per cent next year, the Reserve Bank still expects real wages to fall for at least the next year – that is, prices will keep rising faster than pay packets.
After peaking at 7.75 per cent by the end of this year, inflation is still expected to be about 6.2 per cent by the middle of next year, and 4.3 per cent at the end of 2023.
A key reason for this will be further pain for electricity and gas users.
“Contacts within the bank’s liaison program generally expect further significant increases in retail electricity prices in 2023,” the RBA observed.
“This is largely because the recently announced regulated price increases for 2022 were decided before the latest run-up in wholesale prices and because wholesale prices are expected to remain elevated.”
Consumers can also expect to see more manufacturers and retailers passing the increased cost of their inputs on in retail prices.
“A significant share of firms in the bank’s liaison program have increased prices or expect to do so over the coming months as a result of earlier increases in input costs,” the report noted.
“Some upstream cost pressures are showing signs of easing but it will take some time before this affects prices paid by consumers.”
Risks ‘skewed to the downside’
However, even those downgraded forecasts remain vulnerable to a weaker global economy.
The IMF recently slashed its global economic forecasts, while the Bank of England overnight warned of a long recession in the UK even as it raised interest rates there by half a percentage point.
“The risks to the global outlook are skewed to the downside,” the RBA warned.
“The synchronized nature of the tightening in monetary policy globally could prove quite contractionary, and is occurring at a time when fiscal policy is offering less support.”
Closer to home, the Reserve Bank has an eye on Australia’s biggest trading partner, where economic growth has virtually ground to a halt in recent months.
“Restrictions to control the spread of COVID-19 in China led to an unexpectedly large contraction there in the June quarter; further outbreaks could both weigh on growth in China and disrupt global supply chains,” the bank cautioned.
“The Chinese economy is also contending with weak property market conditions and increasing levels of distress among developers.”
After two days of silence, Commonwealth Bank has finally confirmed it will lift interest rates on its variable mortgages by 0.5 percentage points.
This makes CBA the first of the “big four” banks to pass on the Reserve Bank’s latest rate hike.
The RBA lifted its cash rate target by 0.5 percentage points on Tuesday, taking the new rate to a six-year high of 1.85 per cent.
It was no surprise that the commercial banks would pass on the RBA’s rate increase to their borrowers.
However, the surprising aspect is how uncharacteristically slow the banks have been in making such announcements in the past couple of days.
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Reserve Bank hikes interest rates for fourth consecutive month(Rhiana Witson)
CBA’s main rivals — Westpac, NAB and ANZ — still haven’t provided any update on their new borrowing rates.
Australia’s fifth-largest lender, Macquarie Bank, was the first bank to lift its rates — within hours of the RBA’s decision on Tuesday.
This was followed on Wednesday by ubank — an NAB subsidiary — announcing it would lift its savings rates by 0.5 percentage points in September.
Delay in being the first mover
“This kind of waiting game is unusual, but not unprecedented,” said Sally Tindall, the research director of RateCity.
“Back in 2010, three of the big four banks took between eight and 10 days to make announcements following the 0.25 percentage point RBA hike on 2 November.”
“The delay could be a worrying sign for savers. It’s possible the banks are still mulling over whether they will pass on the full hike to all their savings customers.”
“However, the big four banks could just be playing a game of chicken to see which one of them moves first.”
CBA increased its the standard variable rates for its borrowers by 0.5 percentage points.
The bank also said it would increase the rate on “select savings products”, meaning it has not passed on the RBA’s full rate hike to all savers.
As the Reserve Bank raises interest rates for the fourth time in four months, home loan borrowers are bracing for more repayment pain.
Key points:
Banks are offering big discounts to new home loan customers
The number of borrowers refinancing their home loans is at a record high
Borrowers are shying away from more expensive fixed-term mortgages
The official interest rate is now at its highest level in six years, at 1.85 per cent, up from a record low of 0.1 per cent at the start of May.
Some economists say the RBA is only halfway through its rate-hiking cycle, with the goal of reaching, or even exceeding, 3 per cent by the end of the year.
As the cost of money goes up, the big four banks have dramatically raised interest rates for existing customers with variable-rate loans, and more rate rises are expected.
RateCity said bank customers could expect to see an average variable rate of 4.61 per cent if today’s RBA rate rise was passed on in full.
It said the accumulated 1.75 per cent rise in borrowing costs that had occurred since early May would add an extra $472 a month to mortgage repayments for the typical borrower with a 25-year, $500,000 loan.
Borrowers with a $1 million mortgage would have to pay an extra $944 a month.
RateCity’s estimate of the cost of RBA rate rises on monthly mortgage repayments. (RateCity: Supplied)
Fixed rates are rising
The rates offered for new fixed-rate loans are rising noticeably.
It comes as new Australian Bureau of Statistics (ABS) data show the proportion of new home loans being written with fixed rates has plunged to 9 per cent, down from the July 2021 peak of 46 per cent.
Sally Tindall, the research director at RateCity.com.au, said 90 lenders raised rates on fixed-term home loans last month before this latest increase.
“Fixed-rate hikes are coming thick and fast as the cost of funding continues to put pressure on the banks’ bottom line,” she said.
The financial comparison service Mozo said the fixed rates offered by some online lenders had already emerged to as high as 8 per cent.
As of Tuesday evening, no major bank had announced an interest rate increase in response to RBA’s latest rate hike.
But Macquarie Bank announced a range of different price responses.
It said it would increase its variable home loan reference rates by 0.5 per cent from 12 August.
It will decrease its fixed-home-loan interest rates by up to 0.75 per cent for new customers and existing variable-rate customers who want to fix their interest rate, from 5 August.
And it will increase the ongoing interest rate on its savings and everyday transaction accounts by 0.5 per cent, to 2.25 per cent, on balances up to $250,000.
Refinancing arises, demand for new loans weakens
As the higher cost of borrowing sees demand weakening for new home loans, more existing borrowers are refinancing to try to eke out lower interest rates from their banks’ competitors.
Mortgage broker Mortgage Choice said 42 per cent of borrowers who took out home loans in June were refinancing existing debt.
Discounts offered by banks for new borrowers saw refinancing jump 9.7 per cent in June to a record $12.7 billion.
Meanwhile, the value of new loan commitments being written each month remains near historically high levels, but it is clearly on the decline.
The ABS said the value of mortgage approvals fell by 4.4 per cent in June, on a seasonally adjusted basis, as the RBA’s rate hikes dampened appetite for borrowing.
The value of new loan commitments remains at an historically high level, but it is starting to fall away.(Source: Australian Bureau of Statistics)
“The value of new owner-occupier loan commitments fell 3.3 per cent in June 2022, while new investor loan commitments fell 6.3 per cent,” Katherine Keenan, ABS head of finance and wealth, said.
“These falls followed rises in May, attributed to a clearing of application processing backlogs by lenders.”
Discounts offered for lower-risk borrowers
Research from financial comparison website Canstar shows almost one in two lenders are offering loans with slightly lower rates to borrowers with large deposits.
It says for borrowers with a 40 per cent deposit or the equivalent equity in their property, 49 per cent of lenders on its comparison site are offering interest rates that are on average 0.21 per cent below the rate being paid by borrowers with a half deposit that size.
Canstar financial analyst Steve Mickenbecker said as the economic outlook became more uncertain, lenders were competing harder for lower-risk borrowers.
“Property prices are widely expected to fall by 10 per cent to 20 per cent,” he said.
“Lenders are looking for loans where there is a greater buffer for falls in property prices and almost half of them are rewarding these borrowers with lower interest rate offers,” he said.
“Having enjoyed strong house price increases over the last couple of years, borrowers who have been in their houses for several years now own a healthy share.
“There may be a strong case for borrowers in this position to open up a negotiation with their lenders for a rate reduction,” he said.
Late last month, ANZ reduced rates on new standard variable mortgages by up to 0.5 percentage points for borrowers with bigger deposits.
Ms Tindall told RN Breakfast that it paid for people to shop around, with 10 lenders cutting rates for new customers over the past three months.
“What we do know from all the data that comes through is that new customers, customers willing to switch to a different bank, often get the best deals,” she said.
“Why? Because banks discount rates for new customers, not loyal existing ones.”
The Reserve Bank has increased interest rates for the fourth month in a row, raising its cash rate target by half a percentage point.
Key points:
The RBA has raised interest rates by 0.5 of a percentage point
The cash rate target has now increased by 1.75 percentage points since the start of May to 1.85 per cent
The rise in the cash rate since early May will add about $472 a month to repayments on a $500,000 loan
The RBA has now lifted its benchmark interest rate by 1.75 percentage points since its first rate rise in May, with the cash rate target sitting at 1.85 per cent.
In his post-meeting statement, Reserve Bank Governor Philip Lowe said the latest rate rise was unlikely to be the last this year.
“The board expects to take further steps in the process of normalizing monetary conditions over the months ahead, but it is not on a pre-set path,” he said.
“The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labor market.
“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”
Besa Deda is the chief economist for St George Bank and Westpac Business Bank.(ABC News: Daniel Irvine)
St George Bank chief economist Besa Deda said the Reserve Bank had already raised rates faster than any time since 1994, but she expected more.
“We think their cash rate could have a 3-handle on it by the end of this year, because inflation is running at its fastest rate since the early 1990s,” she told The Business.
“We are expecting that the Reserve Bank will deliver rate hikes for every board meeting until February next year.”
‘Real risk’ of recession
Mr Lowe acknowledged that it would be a difficult task.
“The board places a high priority on the return of inflation to the 2-3 per cent range over time, while keeping the economy on an even keel,” he warned.
“The path to achieve this balance is a narrow one and clouded in uncertainty, not least because of global developments.”
The managing director of EQ Economics and former ANZ Bank chief economist, Warren Hogan, warned that a recession was a “real risk” if the Reserve Bank raised interest rates too fast.
“I think they just need to be patient with this tightening cycle and try and get this inflation under control over a couple of years, rather than rush it and try and get it done within a year,” he cautioned.
He also told the ABC’s AM program that many of the threats to the economy were partly of the Reserve Bank’s own making.
In particular, he singled out the RBA’s statements until late last year that interest rates were unlikely to rise from near-zero until at least 2024, which he said lured many people to borrow too much money.
“I think the first home buyers are the ones who have the most significant grievance,” he told AM.
“When they first start that, they’re the most vulnerable to higher rates. And to be told by the central bank that rates will stay where they are, no matter how much conditionality they put on it, that nuance is lost on the broader community.
“And now they’re staring down the barrel of the most significant tightening of monetary policy in the modern era.”
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The Reserve Bank’s rationale behind fourth successive hike
Figures from RateCity show the latest rate rise, if passed on in full by banks, will add another $140 a month to repayments on a $500,000 home loan.
Since rates started rising on May 3, someone with a $500,000 loan would be paying $472 a month more if their bank had simply matched the RBA moves.
‘It’s gonna be rough’
Man Huynh is one of those first home buyers struggling with the unexpected surge in mortgage repayments.
Man Huynh said he was told to expect no more than a percentage point of rate increases when he purchased his first home in October 2021.(ABC News: Rhiana Whitson)
He also owns two adjoining businesses in the Melbourne suburb of Footscray, selling hot dogs and bubble tea.
With annual inflation hitting 6.1 per cent and interest rate hikes, Mr Huynh is being hit by multiple cost pressures at work and at home.
“Everything’s going up — our bread, our rent, our insurance, everything. Even our wages are going up,” he said of his business costs.
Mr Huynh bought his first house in October last year and, even before today’s rate rise was passed on, his lender Pepper Money had increased his variable interest rate from 3.8 per cent to 5.37 per cent.
“It’s gonna be rough, we don’t know when it’s gonna stop.”
The steep increase in the cost of his mortgage was unexpected for Mr Huynh, who said his mortgage broker told him interest rates would likely only rise by between half to 1 percentage point.
“If you hear that it will only go up by a half per cent, then yes, you go and buy the house,” Mr Huynh said.
Mr Huynh said he would have made different decisions if he had known interest rates would rise this hard and fast.
“Definitely, I would have delayed purchasing my first time,” he said.
Mr Huynh’s climbing expenses come at a time when business is far from back to normal, and he has closed his other outlets to focus on his Footscray site.
“We are in front of a train station, we are in a prime position, yet no one’s catching the train, and everyone is still working from home,” he added.
Housing market, consumer confidence tumble
The rapid rise in interest rates since the start of May, combined with the high inflation that triggered the RBA’s moves, has seen consumer-confidence levels sink to depths usually seen during recessions.
House prices have also started falling rapidly in Australia’s largest cities, while they are softening in other parts of the nation as well.
“It hasn’t taken four Reserve Bank cash rate rises to slow down new borrowing, with the latest ABS new loan commitments showing that new housing lending fell in June by 4.4 per cent,” Canstar finance expert Steve Mickenbecker said.
“New borrowing has now fallen below last year’s level but is still up on pre-pandemic volumes.
“With more rate increases ahead, buyers and sellers are nervous about what is to come from this year’s spring selling season. Investors, who were previously the most bullish sector, are leading the exit.”
Federal Treasurer Jim Chalmers is warning the latest RBA decision will “sting”, even though Australian households have been bracing for further rate rises.
“Families will now have to make more hard decisions about how to balance the household budget in the face of other pressures, like higher grocery prices and higher power prices, and the costs of other essentials,” he told parliament just seconds after the RBA announcement was made.
“This decision doesn’t come as a surprise.
“It’s not a shock to anybody, but it will still sting.”
He argued the warning signs were clear prior to the election, and the federal government’s budget bottom line would also take a hit as a result.
Shadow Treasurer Angus Taylor said Mr Chalmers’ comments would be cold comfort to Australians doing it tough, and demanded more detail soon on any cost of living relief being planned by the government.
“It’s the fourth interest rate increase in a row, we’ve got the highest inflation since the early 90s,” Mr Taylor said.
“We want to see a plan, we don’t want to have to wait till the budget.”
Property prices may be dropping but that doesn’t mean that wannabe home owners are suddenly celebrating.
Key points:
The Reserve Bank is set to hike the cash rate again today
Banks are already winding back mortgage limits as interest rates and inflation rise
Mortgage brokers say a ‘feedback loop’ is emerging in the property market
Lenders are simultaneously winding back how many people can borrow for mortgages as they factor in higher interest rate repayments and cost of living pressures.
Corey Chamberlain and his partner were just told by their mortgage broker that their borrowing capacity with a smaller lender has dropped by more than 20 per cent.
That’s compared with a national property price drop of just 2 per cent in the last three months.
The couple with a young child were first approved for a mortgage of around $975,000 in late 2021, and then again when they went back for pre-approval earlier this year.
That’s when Australia’s official cash rate was still at 0.1 per cent.
Since May, the Reserve Bank has been raising the cash rate to tackle emerging inflation that’s hitting the Australian economy.
Today, the RBA is expected to hike the cash rate again to take it to 1.85 per cent.
Banks are passing the higher cash rate onto borrowers in the form of lending rates, which is impacting the head repayments on people’s loans.
In October, the regulator APRA also told the banks to raise the minimum interest rate buffer on loans from 2.5 per cent to 3 per cent.
Despite the new lending environment, the Chamberlains weren’t expecting their estimated loan amount to drop down from $975,000 to below $750,000 when they went back to their broker last month.
The couple’s deposit hasn’t changed since late 2021 and Mr Chamberlain actually received a slight pay raise recently.
“(Our broker) was pretty open with us about saying it was all down to interest rates,” Mr Chamberlain said.
“One hundred per cent, it’s down to the interest rates.”
The couple sold their house in the New South Wales regional city Newcastle at the end of last year, after Mr Chamberlain’s job was transferred three hours drive south to Wollongong.
They’ve been renting there all year as they’ve struggled to buy a new house on their original approved limit of $975,000.
“It’s just the constant battle of everything’s overpriced and everything that’s in the price bracket needs work done,” Mr Chamberlain said.
The couple were hoping to buy a house with enough bedrooms so that they can expand their young family further. Now their loan amount is reduced, they feel even more dismayed.
“There’s just nothing in our area that we can afford now,” Mr Chamberlain said.
“Maybe a little shack.”
They’re now considering going to a different lender to see if they can get more money, or they’ll consider holding off buying a bit longer to see if property prices in their area go down.
Corey Chamberlain and his partner are trying to buy a new property in Wollongong. (Supplied: Corey Chamberlain)
Rising interest rates are the main factor being credited for the property market’s recent downturn.
CoreLogic’s latest housing price data this week showed that property values nationally have gone down 2 per cent in three months.
That’s the fastest rate of decline since the 2008 global financial crisis.
“Clearly, higher interest rates are eroding borrowing capacity,” CoreLogic’s Tim Lawless told ABC News.
Prices nationally would need to drop by 28 per cent to take the market back to where it was before the pre-pandemic boom.
Currently, CoreLogic is forecasting a drop of 12 to 15 per cent at a maximum by sometime next year.
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Australian house prices dropping at ‘fastest rate’ since 2008(Emilia Terzon)
Mortgage broker Bruce Carr describes the current property market situation as a “feedback loop” where it is not necessarily easier for people to buy a home as their borrowing capacity diminishes.
“You get the feedback loop on the way up, and you get the feedback loop on the way down,” mortgage broker Bruce Carr told ABC News.
“And that’s where the clashing boom and bust cycles come from.”
He hasn’t had any clients have their borrowing capacity wound back yet but he’s expecting this to start happening soon.
Using borrowing calculators, Mr Carr estimates that his clients are now able to borrow 11 per cent less today than they could one year ago.
He believes this is not just because banks are factoring in higher interest rates, but also because a rising cost of living is being factored into people’s household budgets and therefore their ability to repay mortgages.
Annual inflation is currently at a 21-year high of 6.1 per cent in Australia.
“We all know that inflation is feeding into this,” Mr Carr said.
In a statement, APRA acknowledged that borrowing capacity is dropping.
“The recent reduction in borrowing capacity has largely been driven by the increase in official interest rates,” a spokesperson told ABC News.
“All else constant, an increase in interest rates will mean that the maximum amount that households can borrow against their income will decline.
In a statement, the Australian Banking Association said many factors were being taken into account by lenders.
“Every new borrower is assessed on a case-by-case basis due to a wide range of factors including total amount of loan, total amount of deposit, the loan to value ratio or LVR, whether a borrower is an owner-occupier or investor , and an assessment of a borrower’s revenue and expenditure,” an ABA spokesperson said.
“Banks make their own commercial decisions but ultimately competition is strong between banks, and borrowers should regularly review their arrangements and shop around for the best deal.”
House prices in Australia are dropping at their fastest pace since the global financial crisis — and market conditions are “likely to worsen” as interest rates continue to rise, according to property analytics firm CoreLogic.
Key points:
Economists predict Australian house prices could fall between 12 and 20 per cent
The median property value dropped 8.5pc during the GFC
Rents have arisen 9.8pc in the past year
The latest data shows that the nation’s median property value has dropped by 2 per cent since the beginning of May, to $747,182 (a figure which includes houses and apartments).
“Although the housing market is only three months into a decline … the rate of decline is comparable with the onset of the global financial crisis (GFC) in 2008, and the sharp downswing of the early 1980s,” said CoreLogic’s research director Tim Lawless.
But he noted that, on average, prices had jumped 28.6 per cent from mid-2020 (the low point of the housing market during the COVID-19 pandemic) to April 2022 (when national prices hit their peak).
Regional Australia had an even bigger surge, with prices up 41.1 per cent in two years — as smaller towns outside the capital cities experienced a huge influx of city-dwellers seeking better lifestyles (as working remotely became the new normal).
“In Sydney, where the downturn has been particularly accelerated, we are seeing the sharpest value falls in almost 40 years.”
Property prices in Sydney, Melbourne and Hobart fell sharply in July.(CoreLogic)
The median price in Australia’s most expensive city fell by 2.2 per cent in July (taking its quarterly loss to 4.7 per cent). Despite that, an average house in Sydney still costs around $1.35 million, while an average unit may fetch about $806,000.
Melbourne and Hobart also recorded steep falls, with prices in both cities down 1.5 per cent last month, while Canberra prices dropped 1.1 per cent.
Prices in Brisbane and regional Australia fell 0.8 per cent (their first monthly decline since August 2020).
At the other end of the spectrum, Darwin, Adelaide and Perth were the only capitals where prices actually went up in July (by between 0.2 and 0.4 per cent). However, it has been a sharp slowdown since May, when the Reserve Bank began to aggressively lift the cash rate from its record low levels.
short and sharp
“I think this downturn will be similar to the global financial crisis in that it will be quite short and sharp,” Mr Lawless told ABC News.
Australia’s median property price fell by around 8.5 per cent over an 11-month period during the GFC, according to CoreLogic.
Adelaide property prices jumped 3.6pc in the past three months.(CoreLogic)
Mr Lawless said the property downturn is “accelerating”, and that he would not be surprised if “the current decline gets worse than what we saw during the GFC”.
He noted the main difference is that governments and central banks are currently determined to withdraw trillions of dollars worth of stimulus, in a desperate bid to lower inflation (instead of pumping it into the global economy, liked they did after the 2008 crisis).
Many analysts are predicting Australian property prices, on average, will fall between 10 and 20 per cent (from peak to trough) — with the two most expensive cities Sydney and Melbourne likely to suffer the biggest declines.
But even if the worse case scenario eventuates, it will not drastically improve housing affordability.
“If we saw say, a 15 per cent drop in national housing values, it would take prices back to where they were in about April 2021.”
How quickly (and by how much) prices fall will depend on how aggressively the RBA decides to lift its cash rate target in the next few months.
Brisbane and Adelaide tenants are experiencing the sharpest rent increases.(CoreLogic)
Since May, the RBA has lifted its cash rate target from 0.1 to 1.35 per cent.
If the central bank delivers another double-sized rate hike on Tuesday (0.5 percentage points), as widely expected, that would bring the new cash rate up to 1.85 per cent.
Buyers’ market and surging rents
“The market has moved to being very much more in favor of buyers over sellers now, especially in markets like Sydney and Melbourne,” Mr Lawless said.
“Buyers are getting back in the driver’s seat. They have more choice, and there’s less urgency.
“But for sellers, it means they need to be much more realistic about their pricing expectations, and they should expect there’s going to be more negotiation.”
Renters are also disadvantaged in the current property market. As their landlords’ mortgage repayments increase (and more foreign workers and students) return to Australia, rents have surged rapidly.
“Rental markets are extremely tight, with vacancy rates around 1 per cent or lower across many parts of Australia,” Mr Lawless added.
“If you consider the history of rents, it’s very rare to see dwelling rents rising at more than say 3 – 4 per cent per annum.”
But in the past quarter, the national average rent jumped 2.8 per cent — and they are up nearly 10 per cent in the past year.
Looking forward, Mr Lawless said renters may be under increasing pressure to rent out any spare bedrooms to more flatmates, look for cheaper rents in apartments (rather than houses), or “stay at home with mum and dad longer.”
“There’s definitely going to be some negative social outcomes from such high rents, which aren’t showing any signs of slowing down at the moment.”
