Banks, rates and fate
By Tommy Friedman, Credit Analyst at Wefund
Swamped open for inspections, smashed reserves, rundown flats in Bondi selling for millions, suburb records achieved every weekend.
These were the house price related headlines over the last couple of years as dwelling prices posted >20% YoY gains.
Nobody knows for sure what headlines will appear in 2022 and 2023. But the clues are out there; one big one can be found across the Tasman Sea in New Zealand.
A few months ago, Wefund discussed the house price mania of New Zealand. It appears that some of that mania has receded, with prices beginning to trend down. In New Zealand as a whole, for January, prices are down 2.2% from where they were in December and for Auckland, they are down 6.3%. This comes from an already lower base, where prices were down 1.6% in December from November. Important to note that this has taken place following record house price growth in 2021. Nonetheless, the heat does appear to be coming out of a market.
There are many reasons for this: house prices were overextended to begin with. The Ardern Government introduced LVR restrictions, and heavy lockdowns weighed on confidence. Yet the biggest factor is interest rates. New Zealand’s Reserve Bank raised interest rates twice in 2021: in October, from 0.25% to 0.5% and again in November up to 0.75%. For context, Australia’s official cash rate is 0.1%.
The impact of this has been felt across the market; in the commercial world NZ corporate borrowers are facing greater difficulties and costs borrowing money. This is something Wefund is helping clients overcome by partnering with New Zealand lenders and Australian based funds looking to deploy capital to New Zealand. In the world of home buying and residential real estate, fixed and variable mortgage rates have been increasing. In January 2022, the average advertised standard residential mortgage rate over a five-year term was 5.42%, in September 2021 it was 4.65% and in January 2021 it was 3.78%. That means that the cost of servicing a $1 million mortgage went from $3,150 a month in Jan 2021, to $3,875 in September, to $4,516 in Jan 2022.
As rates go up, the debt quantum borrowers are able to service reduces, the amount they can borrow to bid for a property falls and accordingly, sales results fall.
In Australia, our short-term fixed rates home loans are starting to rise above 2%. In 2021, good borrowers were able to access fixed rates below with a 1% handle. It is a certainty that borrowing costs will rise once the RBA raises the cash rate, something that is looking increasingly likely this year. It seems that the effects are beginning to be felt, with the rate of house price increase slowing. In Melbourne, in January 2022, house prices were down 0.2% on December 2021, but were still up 0.8% for the quarter and 15% for the year. As of 19 February 2022, Sydney house prices fell by 0.2% over the preceding four weeks, a first since October 2020.
Wefund understands that interest rates are the weightiest of all the factors that influence house prices, and we understand that as those rates change, the market will gyrate.
Australia is likely only a few months behind New Zealand and in 2022, house prices will slow and fall from their record highs.
Wefund also understands that the economy is booming, that wage growth is strong and supportive of higher servicing requirements, and that high inflation means replacement values are rising, supporting existing, built houses and apartments. So while house prices may fall slightly, this will be a slight correction and not a sharp sell off. We also know that our financial system is in good health, that banks have low leverage, that lending has been prudent, and borrowers can service their debt.
So we take the view that in 2022, banks will raise rates and some overheated parts of the market may face their fate. But overall, we are optimistic. We have lived through market cycles before and we know that sensible projects and investments can stand the test of higher interest rates.
Nonetheless, it is important to recognise the changing macro-economic reality of inflation and rising interest rates. The property market is slowing, and the unabated good times of record low interest rates and record growth may be behind us. Thankfully, Wefund’s experience, transparent services and technology places us in good stead to navigate a rising rate environment and achieve the best and most appropriate outcomes for their clients that allow them to take control of their own fate.
All data is sourced from Corelogic, REINZ, RBNZ and the RBA
