Higher rates could burst housing price bubble but there’s a way to go yet
HOME loan rates need to rise to almost 6 per cent before house prices nationally start sliding, according to a new report.
The analysis follows out-of-cycle rate hikes at National Australia Bank and Westpac that targeted owner-occupiers and property investors.
Amid expectations that other banks will follow, stockbroker Shaw and Partners warned there could be a significant fallout from the rate rises.
Investors should not discount the chances of higher rates bursting a “bubble” the Reserve Bank had created by cutting the official cash rate to a record low 1.5 per cent, the note said.
Analyst David Spotswood said if the cash rate rose to 3.5 per cent or real mortgage rates headed to about 5.75 per cent, it would be the spur for house prices to fall nationally.
“This may sound large, but who knew interest rates would get this low,” he cautioned.
“We find it continually surprising that people talk of a crash in house prices due to supply, fear of lack of Chinese buyers, falling commodity prices etc. The key drivers of house prices are the availability of finance, the cost of finance, and if you have a job.”
According to the RBA, the average standard variable mortgage rate was 5.25 per cent last month, while the average discount variable rate was 4.5 per cent.
On Shaw’s analysis, borrowers could still have access to owner-occupied mortgage rates of about 4 per cent after discounts, providing “cheap” debt where a $1 million loan costs about $4000 of interest per month.
Mr Spotswood said house prices were 25 per cent overvalued based on wage levels.
“Pre-2000, house prices were five times yearly income. Now they are eight times,” he said.
“House prices are 60 per cent overvalued versus 2000 on this basis. House prices look like a bubble on this measure.”
However, he noted house prices looked “well supported” relative to interest rates and could lift further.
The research concluded that on the last two occasions when house prices fell nationally, in 2009 and 2012-14, debt repayments exceeded 30 per cent of borrowers’ wages.