Australian house prices are starting to fall, despite record low RBA interest rates


Australia has certainly enjoyed a spectacular property boom since the GFC. Buoyed by low interest rates, rising migration, and increasing urbanisation – prices in Sydney and Melbourne have risen 80 and 60 percent respectively since 2011.


However, the property sector is now facing mounting headwinds. Australian wage growth has fallen over the past 15 years, and so house prices gains have been funded in large part by increases in household debt.


Australia’s debt to income ratio is now a record 190 percent, among the world’s highest – making it difficult to fund further growth through increases in debt.

Compounding this is a tightening of lending standards amongst the banks, and a slow increase in global interest rates. The tighter lending standards has made it harder for many to get a mortgage – and has locked some borrowers into what is colloquially known as a “mortgage prison” – where a borrower is unable to refinance their mortgage due to stricter lending rules – locking them into their current borrowing arrangement.


Additionally, despite a record low cash rate of 1.5 percent from the Reserve Bank, which has been held for a record 2 years, some variable mortgage rates are starting to rise. This had been attributed to a lift in global interest rates – which is increasing many banks’ cost of funding.


The disconnect has occurred as most lenders now source their funds overseas, which has led to an increase funding costs for many of Australia’s banks. Some of these banks are now starting to pass these increased costs on to borrowers; AMP, Bank of Queensland, Suncorp, ME Bank, and Macquarie Bank have all lifted some of their variable mortgage rates in the past few months.


Rising interest rates not only limits the amount that an individual can reasonably borrow –it also makes it increasingly difficult for existing borrowers to service their current mortgages – potentially leading to mortgage stress, defaults, and a further property supply increase in an already falling market.


Economists surveyed by Bloomberg predict that these factors mean prices won’t start rising again in Sydney and Melbourne until at least 2020. AMP Chief economist Shane Oliver agrees with the those surveyed by Bloomberg, suggesting that prices could experience a top-to-bottom fall of 15 percent in that time.


Data from Domain Group and CoreLogic shows that house prices in Sydney have already fallen approximately 5 percent from their highs, whilst prices in Melbourne have fallen approximately 3 percent.


The Reserve Bank of Australia hasn’t lifted official interest rates while property prices in Sydney have been falling at any time this century, so it is expected that the RBA will hold rates at record lows for the time being. However, it is increasingly looking like this will have little effect, with prices already starting to fall, and many mortgage rates already starting to rise.


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