As interest rates began to rise this year, many Australians thought it might be their chance to rest – but not everything is as it seems.
As interest rates began to rise this year, many Australians were worried about how they would be affected by the move to eliminate the sting of rising inflation.
Australians with large housing loans were among the most concerned, but there were also key demographics who were considered winners in the new rate of interest rate hike.
Retirees with big savings were one thing, but it was a battered generation of younger Australians who wanted to enter the housing market, looking at the RBA’s decision in the most positive light.
They were set aside as property prices continued to rise to astronomical levels – slipping more and more out of range over time.
Rising interest rates on the RBA give a glimmer of hope that house prices will fall; and we are already beginning to see a decline in property prices.
Property prices in the country fell 0.1% in May, the first monthly drop since September 2020. Experts now warn they could decreased by a whopping 20 percent in Australia over the next 18 months.
However, this may not be the big win that some younger Australians think it is.
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The affordability of housing is deteriorating
In a bomb report, analysts at Moody’s Investors Service He said that even if house prices fell by more than 20 per cent, it would not solve the country’s housing affordability crisis.
In fact, they say it would make the situation worse, as higher interest rates will make it harder for new buyers to pay off mortgages, even on much cheaper housing.
They said that in January, the average Australian two-income household needed 25.7% of its monthly income to cover the repayment of a new mortgage. In May, this rose to 26.8% and they expect it to continue growing.
If we talk about the two big cities, Sydney and Melbourne, this figure becomes even more alarming. The average household in Sydney needed 37% of their income to repay their loans. In Melbourne, they needed 29.8 percent, according to the survey.
According to Moody’s analysts, affordability will continue to decline despite falling property prices, as rising interest rates will lead to increased mortgage payments.
“We expect house prices to fall for the rest of this year and in 2023, as rising interest rates weigh on real estate sentiment,” they said.
“Based on our assessment of different scenarios for house prices and interest rates, we expect that prices will not decrease to the extent that housing affordability improves as interest rates rise this year.
Moody’s modeling shows that if the RBA raises interest rates to 2.85 percent and property prices fall by about 10 percent, housing affordability will continue to deteriorate.
If the RBA raises the monetary rate to 2.85% this year, our modeling shows that housing affordability will continue to deteriorate unless housing prices fall by about 22%, a much larger decline than in we are currently waiting until the end of this year, “Moody said.
Meanwhile, ANZ predicts that cash will reach 2.6% by the beginning of next year, which according to the bank’s economists will reduce property prices by 5% in 2022 and another 10% next year.
However, Moody’s warned that even if the exchange rate ended the year at 2.35%, house prices would have to fall by 22% to see even a slight improvement in affordability.
The head of the RBA will speak against the background of rising inflation
Reserve Bank Governor Philip Lowe will give a lecture today on Inflation and Monetary Policy to the American Chamber of Commerce in Australia.
He is expected to talk about the comments he made in a rare TV interview last week on ABC 7.30 am in which he said the bank would do whatever it takes to bring back inflation within the RBA’s 2-3 per cent target range.
In this interview, he predicts that inflation will reach 7 percent by Christmas and will not begin to fall until the first quarter of next year, and interest rates will reach 2.5 percent.
“I think Australians need to … be prepared for higher interest rates,” Dr Lowe said.
“We had emergency settings during the pandemic, I think that was the right thing to do, but the state of emergency is over. And it is time to remove the emergency settings and move to more normal monetary policy settings. “
Dr Lowe said he believed it was “reasonable for interest rates to reach … cash interest rates up to 2.5 percent at a time”.
He added that the RBA will do “what is needed” to deal with rising inflation.
“It is unclear at this time how much interest rates will need to be raised to achieve this,” Dr Lowe said.
“I am confident that inflation will decrease over time, but we will have to have higher interest rates to achieve this result.