RBA Declares War on Homeowners: Rising Interest Rates Hurt House Prices and Borrowing Prospects
In recent times, the Australian housing market has witnessed a significant shift, leaving homeowners feeling the brunt of a battle declared by the Reserve Bank of Australia (RBA). As interest rates continue to rise, homeowners are finding it increasingly challenging to secure loans, ultimately impacting the housing market and housing prices.
The Impact of Rising Interest Rates
The RBA’s decision to raise interest rates is a response to various economic factors, including inflation concerns, market stability, and monetary policy objectives. However, the unintended consequences of these rate hikes have begun to take their toll on homeowners. As the cost of borrowing increases, potential homeowners find themselves facing tighter lending conditions and reduced access to credit, making it harder to secure loans and purchase properties.
The once-flourishing housing market, which has long been a cornerstone of the Australian economy, is beginning to show signs of strain. Rising interest rates dampen buyer enthusiasm, as the affordability of homes declines. As a result, demand weakens, leading to a slowdown in house price growth.
The Struggle to Borrow
The RBA’s efforts to cool down an overheating economy have inadvertently made it difficult for prospective homeowners to enter the property market. With higher interest rates, the cost of servicing mortgages escalates, eroding borrowers’ purchasing power. Many individuals who were previously qualified for loans now face rejections or are forced to settle for smaller mortgage amounts. This creates a ripple effect throughout the housing market, as reduced demand leads to decreased competition among buyers, putting downward pressure on house prices.
Furthermore, existing homeowners who were planning to refinance their mortgages or tap into their home equity face a similar predicament. Higher interest rates mean that refinancing may no longer be a viable option, leaving homeowners with limited financial flexibility. This not only hampers the prospects of homeowners seeking to unlock the value of their properties but also limits their ability to invest in home improvements or meet other financial obligations.
The Housing Market Conundrum
The impact of rising interest rates on the housing market is a cause for concern. As potential buyers face obstacles in securing financing, the overall demand weakens. Consequently, house price growth is likely to stagnate or slow down, resulting in a less robust market.
Moreover, the interconnected nature of the housing market can have a cascading effect on the broader economy. A slowdown in the housing market not only affects homeowners and potential buyers but also has implications for builders, construction workers, and associated industries. A decline in housing activity can lead to job losses and decreased consumer spending, which in turn dampens economic growth.
The rising interest rates in Australia have inadvertently created an arduous environment for homeowners and potential buyers. The battle declared by the RBA has made it increasingly difficult for individuals to secure loans, hampering the housing market and impacting house prices. While the RBA’s actions are aimed at maintaining economic stability, it is crucial to strike a balance that minimizes the negative consequences on homeowners and supports a healthy housing market. Collaborative efforts between policymakers, financial institutions, and the government are essential to find innovative solutions and mitigate the challenges faced by homeowners in Australia.
While the Reserve Bank of Australia (RBA) plays a significant role in setting interest rates and managing monetary policy, it is important to recognise that the challenges faced by homeowners in the current housing market extend beyond the actions of the central bank. The injection of “fake” money, or stimulus measures, implemented by governments worldwide to mitigate the economic impact of business closures, travel restrictions, and disrupted industries during the COVID-19 pandemic, has also contributed to the complexities of the housing market.
Governments globally resorted to massive fiscal stimulus packages and quantitative easing measures to prevent widespread economic collapse and “support” struggling businesses and individuals. These measures involved injecting liquidity into the economy through various means, such as direct cash transfers, wage subsidies, and infrastructure spending. While these initiatives helped in preventing a more severe economic downturn in the short term, they have had unintended consequences.
One consequence of the injection of stimulus money is the potential inflationary pressure it creates. With more money circulating in the economy, there is an increased risk of rising prices, including in the housing market. As demand for goods and services increases, including housing, prices can surge, making it even more challenging for homeowners and aspiring buyers to enter the market.
Furthermore, the injection of stimulus funds has had a significant impact on investor behavior. Low-interest rates, combined with excess liquidity, have prompted investors to seek higher returns, often turning to the housing market as an attractive investment option. This increased investment activity has driven up housing prices, further exacerbating the affordability issues faced by homeowners.
It is crucial to understand that the RBA’s role is primarily focused on managing monetary policy to maintain price stability and promote economic growth. While interest rates do influence borrowing costs and, consequently, housing affordability, they are not the sole factor shaping the housing market. The interplay between fiscal policies, government interventions, market dynamics, and global economic conditions also significantly impacts the housing sector.
While the rising interest rates set by the RBA have contributed to the challenges faced by homeowners, it is essential to consider the broader economic landscape. The injection of stimulus money by governments to prop up economies during the pandemic has had unintended consequences on the housing market, including potential inflationary pressures and increased investment activity. A comprehensive understanding of these various factors is necessary to address the complexities of the housing market and develop effective policies to support homeowners and promote a balanced and sustainable housing sector.
It’s fast becoming time to pay the piper
With an uptick in inflation and a downturn in the economy – known as dragflation – the time is fast approaching for the average Australian consumer, homeowner, and taxpayer to pay for the sins of our government. The injection of fake money into our economy has propped up stock markets and the real estate market. This cannot last forever, as there is no value backing the money that is being injected. The RBA isn’t solely to blame, however. Due to pressures from governments (both left and right-leaning), the Reserve Bank kept the cash rate low for a cheap rush of prosperity. So much so that some people decided to retire early and make the most of their increased superannuation. Just like a 5-year-old on a sugar rush we are about to hit a wall.
So who gets stuck with the bill?
It will come as no shock to you that it is us that will end up paying for this shortsighted spending spree. In particular, Gen Y, and Gen Z will foot the bulk of the bill, as they look down the barrel of a lifetime of government deficit. Gen X will be hurting a bit, but most of this generation already of good equity in their jobs and property, and with plenty of working years ahead of them. Older baby boomers should be able to avoid the worst of the economic downturn, while those at the younger end are faced with the fact that they are now more likely to outlive their “Super.” This is a scary thought (especially if they retired early) as many of these people are past the age of employment in many industries (think manual labour industries), while others may simply not be willing to go back to work after having finally retired after 4 decades.
Many retirees may be forced to liquidate their larger assets and downsize to a small property and eliminate things such as overseas travel and other such perks of retirement. Those who still have a mortgage to pay will be put under even more pressure as they see their superannuation dwindle as their mortgage repayments increase – all while the cost of a loaf of bread continues to climb.
Unfortunately for many, they may realise far too late and choose to downsize after the housing market has already dropped. While this doesn’t mean they would take a direct loss on selling their property, it would make things a lot harder when they are forced to sell.
Fortunately, right now, there is still a lack of supply in the housing market, and while we have seen some correction (downturn) already the prices are still high for those selling. If you’re thinking about your future and considering selling your property while the prices are still high contact me today.