Why two-thirds of Australian home borrowers need to be worried as interest rates keep rising

Two-thirds of Australian variable-mortgage home borrowers will be hit by more rate hikes in the coming months, as ANZ forecasts an 18 per cent fall in house prices – but inflation may at least ease.

Credit rating agency Moody’s fears rising interest rates will cause more Australians to struggle to repay their mortgages, leading to more loan defaults.

The ANZ bank now forecasts an 18 per cent fall in house prices in the capital by 2023 from 2022 highs, but this would be followed by a 5 per cent rise in 2024.

In this scenario, Sydney’s median house price would fall by $255,053 from its April peak of $1,416,960 to $1,161,907 at the end of 2023, based on CoreLogic data.

House prices in Sydney are already down 10.6 per cent in 2022 to $1,257,625, as of October, and any recovery in 2024 would bring values ​​back to where they are today.

Two-thirds of Australia’s home borrowers with a variable mortgage will be hit by more rate hikes in the coming months – with ANZ predicting an 18 per cent house price drop (pictured is a Melbourne auction)

ANZ senior economists Felicity Emmett and Adelaide Timbrell said property price falls were likely to continue into next year as higher interest rates would reduce banks’ borrowing capacity.

“The biggest factor driving down prices is reduced borrowing capacity, not an increase in forced sales,” they said.

“With our expectation of the cash rate peaking in May next year, we believe most of the impact on prices will be fully visible by the end of 2023.”

ANZ expects the Reserve Bank of Australia to continue raising cash rates until it reaches an 11-year high of 3.85 per cent in May 2023 – an increase from the existing nine-year high of 2.85 per cent.

It forecasts another rate hike of 0.25 percentage point in December to a new 10-year high of 3.1 percent.

This is despite new data from the Australian Bureau of Statistics showing inflation grew 6.9 percent in the year to October, down from a 32-year high of 7.3 percent in the year to September .

As a possible sign of hope for homeowners, Commonwealth Bank economist Stephen Wu said this showed that inflation is likely to peak towards the end of 2022 and not worsen in 2023.

“The RBA will welcome news that inflation slowed in October, but the path from here for inflation is uncertain and will depend on how energy prices evolve,” he said.

The ANZ bank now forecasts an 18 per cent fall in house prices in the capital by 2023, from 2022 highs, but this would be followed by a 5 per cent rise in 2024 (Sydney branch photo)

Sally Tindall, research director at RateCity.com.au, said the lower inflation rate could give the Reserve Bank an excuse to stop raising rates in December after seven consecutive monthly increases since May.

“The possibility of a pause has become a live option for the RBA this Tuesday based on these latest inflation numbers,” she said.

ANZ economists Catherine Birch and Finn Robertson noted that nearly two-thirds of Australian home borrowers had a variable rate mortgage, meaning they would see a large increase in their monthly mortgage payments with any future rise in interest rates.

“Australian households have a higher share of debt at a floating rate, which allows for faster transmission of monetary policy to the real economy,” they said.

“The floating rate share is admittedly lower than normal at 65 percent — compared to about 80 percent before the pandemic.”

As interest rates continue to rise, credit rating agency Moody’s is concerned about rising interest rates leading to more defaults, where a borrower falls 30 days behind on their payments, and defaults.

“Slowing economic growth, the cumulative effect of multiple interest rate hikes over the past year and high cost-of-living pressures will weigh on borrowers’ ability to repay loans in 2023,” the report said.

Credit rating agency Moody’s is concerned that rising interest rates will cause more Australians to struggle to repay their mortgages, leading to more defaults (pictured are houses in Oran Park in Sydney’s far southwest)

“We expect the number of arrears and the number of defaults to increase slightly.”

ANZ expects delinquent rates to rise after interest rates peak in mid-2023 and that the bulk, or 62 percent, of super-cheap 2 percent fixed rate loans will mature between June and September next year.

Should interest rates rise from 2.85 percent to 3.85 percent in May, a borrower with an average mortgage of $600,000 would see their monthly payments rise from $3,145 to $3,517.

This $372 increase would come on top of the $839 increase since May.

So in a year, monthly repayments would have increased $1,211 or 52.5 percent.

But ANZ warned that interest rates could stay high longer if inflation takes longer to return to the Reserve Bank’s target of 2 to 3 percent.

“That would ultimately mean an extended tightening cycle, higher final cash rates and prolonged house price pressure,” it said.

Higher interest rates also reduce banks’ lending capacity, as they must assess a borrower’s ability to cope with a three percentage point increase in variable mortgage rates.