Will Australian house prices rise?

The Reserve Bank has paused its interest rate hikes as it worries about the economy and inflation. The housing market remains tight and expensive, making it difficult for new buyers and easier for existing mortgage holders.

Australian Housing Market Overview

1. Interest Rate Situation:

Interest Rates Stabilizing: The Reserve Bank of Australia (RBA) has signalled an end to the recent interest rate hikes, pausing at a cash rate of 4.1%.
Why? The RBA is concerned that further increases might risk slowing down the economy more than anticipated, possibly leading to a recession.
Impact on Mortgage Holders: This is good news for those with mortgages, as payments had risen 98% since last March. The RBA appears to believe that the economy’s risks are greater than inflation.

2. Inflation Outlook:

Predictions Remain the Same: Inflation is predicted to reach about 3.25% by the end of 2024, returning to the 2-3% target range in late 2025.

3. Home Lending & Property Prices:

Home Lending Down: The 400 basis points increase in rates led to an 18% fall in home lending over the past year.
But No Fall in Property Prices: Despite the drop in lending, house prices seem set to continue rising.
Why? This is linked to increased lending during the pandemic at near-zero interest rates and government stimulus, such as the homebuilder program.

4. The State of Home Lending Now:

Back to Pre-Pandemic Levels: The value and number of home loans are back to where they were in 2019. In some areas, the number is even higher.
Change in Purpose: There’s a big drop in loans for building new homes.

5. Cost of Building & Housing Supply:

Building Costs Soared: The cost of housing construction has risen 30% since the end of 2020.
Limited Supply: Fewer new residential buildings were approved for construction, and competition among buyers will likely continue over the current housing stock.

6. Size of Home Loans vs. Income:

Loans Getting Larger: The average new home loan is 30% larger than it was in 2019, while household incomes have only increased by 14%.
Impact: The average home loan is now roughly 11 times the size of per capita household income, making it more difficult for potential buyers to enter the market.

Conclusion:

Australian housing prices seem set to continue rising despite the biggest increase in interest rates in 30 years. The halt in rate hikes is a relief to current mortgage holders but makes it more challenging for new buyers to enter the market.

Existing homeowners are benefitting from the pause in interest rate hikes, but the cost of building new homes, combined with the increase in the size of home loans relative to incomes, is making homeownership more elusive for prospective buyers.

In simple terms, if you’re looking to buy a house in Australia right now, you may find it more expensive and competitive, while current homeowners can breathe easier with no immediate further increase in interest rates.