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Impending rate hike: will house prices decrease and affordability improve?

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The great Australian dream of homeownership has become increasingly difficult to achieve for many house hunters during the COVID pandemic, but could the dream be even more unattainable in 2022? Attwood Marshall Lawyers Property and Commercial Lawyer Andrea McGarry discusses the potential impact interest rate hikes could have on the housing market and affordability.

Background

The frenzied buying and selling of property across Australia over the past year added up to one-third of the country’s national economy, with a whopping $688.7 billion spent on homes.

As home values surged by more than 20 per cent in some parts of the nation – rising at their fastest rate in over 30 years – data showed there was a 57 per cent jump in housing settlements.

The figures from conveyancing platform PEXA showed property transactions soared to more than 834,000 last year in New South Wales, Queensland, Victoria, Western Australia and South Australia, up by 38 per cent compared to 2020.

As a result of the skyrocketing property prices, there is now a laser-like focus on housing affordability and how younger generations are being locked out of buying.

While there have been predictions the property market will experience a serious drop mid this year, with 2023 house prices predicted to plunge by a whopping 11 per cent, according to NAB, other experts aren’t so convinced.

Keep your eyes on interest rate rises

Australia’s major banks are hiking up their fixed-term interest rates in response to concerns about surging inflation in the USA.   The move comes on the back of a spike in the cost of fixed rate funding and an expectation the US Federal Reserve will lift rates faster and more aggressively than previously anticipated.  It all comes down to what’s happening in international bond markets.

Because fixed loans require a bank to charge borrowers the same interest rate over a given period, the funding they must access to offer this product must cost them the same amount over time, too.  As a result, banks source the money that they lend to fixed-rate borrowers from international bond markets, instead of from short-term cash markets where the cost of funding is more volatile.

Banks issue one, two, three, four and five-year bonds to investors, who demand a set interest rate over that time frame.  This is where what’s happening around the world affects how much people pay for their mortgages in Australia.

Despite the banks putting up their fixed-term rates in recent months, the short end hasn’t really moved and the Reserve Bank is telling Australia that short-term rates will stay at rock-bottom levels until at least 2023.

Pressure on The Reserve Bank

The Reserve Bank is facing pressure to increase interest rates this year following higher than expected inflation data and a strong improvement in unemployment rates. This is despite the RBA previously saying the outlook was for rates to remain at record lows until 2024.

The Reserve Bank of Australia has unveiled massive changes to monetary policy as well as signalling its intent on interest rates.  Reserve Bank Governor Philip Lowe has urged new homeowners to build in a buffer to withstand any increase in mortgage repayments as the economy recovers from the COVID-19 recession. 

Surging inflation and a better-than-expected improvement in the jobs market ignited expectations the RBA would join other central banks in winding back huge levels of financial support.

At its first meeting for 2022 on 1st February, the RBA board left the official cash rate at a record low 0.1%.

While financial markets and a number of economists are forecasting a rate rise this year, the RBA has indicated that it is not ready to make a move just yet.

At this stage, official interest rates remain on hold, but banks have been lifting fixed mortgage rates in recent months.  ABS data released recently showed new home loans rose 4.4% to a record high of $32.8 billion in December 2021, driven by the second consecutive monthly rise in owner-occupier lending.  The RBA reports also showed housing credit grew by 0.7% in December, with the annual rate rising to 7.4%, the strongest annual pace in six years.

Homebuyers could face higher mortgage repayments as early as June 2022 if financial markets and economists are right and there is a rapid run-up in inflation. This could force the Reserve Bank to lift official rates above 2 per cent within a year.

How will mortgage interest rate rises impact the property market?

When interest rates are low, it generally encourages prospective home buyers to enter the market. Since obtaining a home finance is more affordable, those who may have been on the fence regarding the purchase of Australian property are more likely to take out a home loan and buy real estate.

In turn, this increase in demand for property leads to rising property values as inventory is scooped up and homes become more difficult to obtain.

Of course, the inverse is also true. When interest rates are high, consumers may be unwilling to take out the mortgages they need in order to enter the property market. With fewer people looking to buy, the value of real estate stagnates or declines.

Interest rates are a major factor in property cycles, and for that reason, it’s important for potential home buyers to keep an eye on where interest rates are and where they may be heading.

In a development that feeds into growing federal concerns about cost-of-living pressures ahead of an election due by May 2022, the nation’s biggest lender, the Commonwealth Bank, said it believed the RBA would have to start increasing interest rates by the middle of the year.

Even a 1 per cent rise could add hundreds of dollars a month in repayments on the average new mortgage.

Attwood Marshall Lawyers – helping buyers and sellers navigate an ever-changing property market

With market activity expected to alter following the impending interest rate rise, our team are ready and available to provide buyers and sellers with trusted pre-signing advice.

Many people have been using extreme tactics to secure property such as offering well above asking price, waiving cooling-off periods, or even removing imperative special conditions from the contract such as finance clauses, to ensure their offer stands out.

With these tactics comes additional risk, and it is always important to ensure the contract you are signing is in your best interests and that you have a comprehensive understanding of the special conditions and timeframes that apply to the transaction.

At Attwood Marshall Lawyers, we aim to help people quickly so that they can be supported throughout the buying and selling process and ensure they do not miss out on securing their next property. We help our clients make an informed decision so that they can be in the best position to buy or sell in today’s market. Our property lawyers can assist in drafting and negotiating special conditions, reviewing contacts, providing advice on what searches should be undertaken when buying a property, or what sellers must disclose, ensuring there are no nasty surprises along the way for all parties involved.

As a PEXA certified law firm, we strive to ensure settlement can proceed smoothly and happens on-time.

To avoid risk or unnecessary delays, it’s important to get the right legal advice. Contact our Property and Commercial Department Manager, Jess Kimpton, on direct line 07 5506 8214, mobile 0432 857 300 or email jkimpton@attwoodmarshall.com.au to discuss your property needs.

If you require advice outside of standard office hours, our Robina Town Centre office is open Thursday night until 9pm and Saturday morning until 12noon, or alternatively, our lawyers can be contacted on our 24/7 phone line on 1800 621 071.

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