Reserve Bank of Australia official says higher interest rates could benefit home buyers
A senior Reserve Bank of Australia (RBA) official said it would take about two years for the decline in house prices caused by rising interest rates to offset the increase in mortgage repayments.
Speaking at the Australian Financial Review’s property conference in Sydney, the head of domestic markets at the Reserve Bank of Australia, Jonathan Kearns, said the amount of money home buyers could borrow decreased with higher interest rates, which would relieve demand for housing and lead to lower housing prices.
Also, he said, as house prices begin to decline over time, rising mortgage payments would be offset by smaller loan sizes.
“Estimates suggest the net effect is that mortgage payments for new buyers would be higher for about two years due to rising interest rates,” he said.
“But after that, declines in house prices and mortgage sizes start to dominate.”
However, Kearns said the RBA’s modeling was highly conditional and did not take into account other factors that affected house prices.
Impact of interest rates on house prices
Meanwhile, the official pointed out that a 2% increase in interest rates would cause house prices to fall by about 15% in two years.
It should be noted that the RBA has raised the official exchange rate by 2.25% since May.
Nevertheless, Kearns said the figures above were not a prediction of where the Australian property market would go after two years, but rather an estimate of the sensitivity of house prices to interest rates if there were no other factors affecting the market.
“Many factors other than interest rates also influence house prices,” he said.
“For example, demand for housing would be higher with stronger growth in household income, an increase in population through immigration, or a preference for fewer people living in each household.”
In addition, he noted that only ten percent of borrowers took out the maximum possible loan, which resulted in reduced borrowing capacity less than some people thought.
“For many borrowers, the amount they spend on a new home would decrease only slightly or not at all, because their savings to use as a deposit need not decrease with higher interest rates,” he said. said Kearns.
Regarding the impacts of interest rate hikes, Kearns said some parts of the real estate market would be hit harder than others, and the high-end housing segment was likely to fall faster.
“Interest rates can have larger effects on house prices in places where housing supply is less flexible, mortgage debt is higher, there are more investors, and incomes are higher. “, did he declare.
Kearns also said there was evidence apartment prices were less vulnerable to changes in interest rates, which he said was partly due to the limited supply of zoned land available.
The official’s remarks came shortly after a parliamentary committee held a public hearing to probe the RBA’s response to the COVID-19 pandemic.