The property market could reach a tipping point if the Reserve Bank lifts the cash rate to 4 per cent or above, economists warn, as high mortgage costs reach a critical level for some households.
Economists differ on just how biting the rate rises will be for household budgets and the wider economy, but some are concerned about the possibility of a 4 per cent cash rate.
Buyers who borrowed in the past two years were stress-tested on their ability to repay their loans with a 2.5 per cent or 3 per cent buffer — a level already exceeded by the recent hikes that have taken the cash rate to 3.6 per cent.
The most indebted borrowers may not be able to keep paying their mortgages at the 4 per cent mark, triggering distressed sales.
SQM Research founder Louis Christopher said stubborn inflation and a cash rate of 4 per cent or above had a real chance of destabilising the economy and forcing distressed property sales. He said he formed this view through interviewing some, mostly non-bank, lenders about their clients’ financial positions.
“Obviously, it’s a matter of probability, and we think the probabilities would start rising north of 50 per cent of a hard landing in the economy and a double dip downturn in the housing market,” he said. “If we go over 4 per cent … [they] are very concerned, and they believe many of their borrowers will be forced to sell.”
However, Christopher thought the potential rates “pause” telegraphed by the Reserve Bank in their latest statement could avert major sell-offs. His comments come as the downturn in property prices shows signs of stalling.
“The RBA is absolutely spot on when they say the path is very narrow for a soft landing and they’re taking it very close to the wire,” he said.
AMP Capital chief economist Shane Oliver was a little more pessimistic. Even with a pause, the full effect of the rate hikes would take some time to be fully known, he said.
“The whole process is not over yet,” he said.
Distressed sales were within the realm of possibility, he said, despite the recent stabilisation in property markets.
“My inclination would be to think if you get above 4 per cent, that would create distressed selling,” he said. “But it hasn’t happened yet and that has given some confidence to some of us.
“If we keep going higher, every time we see an interest rate hike from the RBA it adds to the risk. There’s also the continuing unknowns from the flow-on effects of the hikes.”
However, bank collapses in the US have increased the risk of a recession and therefore increased the likelihood of a rates pause, Oliver said. Since the collapses, market expectations have moved towards a lower rate than previously predicted.
PRD chief economist Dr Diaswati Mardiasmo felt a peak above 4 per cent was a given; the most important issue was how the Reserve Bank chose to get there, and how the federal government and wider economy reacted.
“A lot of us have prepared for a 4 per cent rate. It’s been on a lot of people’s minds that the peak is around four, so it’s more if it’s a slow or fast climb,” she said.
Mardiasmo said other than a further decrease to buying power, high rates would mostly impact recent buyers who hadn’t had much time to build up equity.
“In terms of how it’s going to affect the whole market we aren’t going to see a massive crash because of it,” she said. “But in certain pockets there will be a bigger problem, particularly places with house and land packages where there are lots of first home buyers.”
Commonwealth Bank head of Australian economics Gareth Aird was only projecting a cash rate peak of 3.85 per cent and a national peak-to-trough house price decline of 15 per cent.
Aird was the only big-four bank economist who had not predicted a peak of 4.1 per cent.
He felt a wave of distressed sales was unlikely given the property market had proved more resilient and stabilised over the past few months.
“Where the pain will be is coming from those who have already borrowed, are on a fixed rate and are rolling off onto a much higher floating rate,” he said. “There will be some people in that bracket, but history shows in general that as long as people hang onto their jobs they find a way to meet their mortgage repayments, and it just means they cut back a lot more on spending.
“There are people who will run into difficulty servicing their mortgage, but the first response will be pulling back as much as possible on discretionary spending.”
Article source: www.brisbanetimes.com.au