Falling prices not enough to make housing more affordable: Moody’s

Falling prices not enough to make housing more affordable: Moody’s

“Based on our assessment of different housing price and interest rate scenarios, we expect that prices will not decline to the extent that housing affordability improves while interest rates are rising this year.”

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Financial markets put the chance of the Reserve Bank taking the official cash rate to 1.5 per cent at its July 5 meeting at 82 per cent. That would be a rate rise of 0.65 percentage points.

Such an increase would add almost $300 to the monthly repayments on an $800,000 mortgage. That would be on top of the $650 a month in extra repayments from the increase in interest rates since May 4.

Last week, the Fair Work Commission increased the minimum wage for the 2022-23 financial year by 5.2 per cent. The RBA and private sector economists expect wages growth to pick up due to the tight labor market.

But Moody’s said even sizeable increases in wages won’t be enough to keep up with the impact of higher interest rates on mortgage repayments.

“Rising interest rates will overshadow higher incomes in addition to housing price declines,” Moody’s found.

RBA governor Philip Lowe is expected to give more guidance on the bank's interest rate strategy on Tuesday.

RBA governor Philip Lowe is expected to give more guidance on the bank’s interest rate strategy on Tuesday.Credit:Louie Douvis

Moody’s modeling of the property market found the sheer size of new mortgages meant that to keep affordability at its current level would require a 22 per cent drop in prices with the official cash rate at 2.85 per cent. The agency is not forecasting such a large fall in prices.

If prices fall 10 per cent, as some banks are forecasting, affordability will continue to decline.

Reserve Bank governor Philip Lowe on Tuesday will address the American Chamber of Commerce in Australia, delivering a speech entitled “Inflation and Monetary Policy”.

He is expected to expand on comments he made in a rare television interview last week in which he said the bank would do whatever was required to bring inflation back to within the RBA’s 2-3 per cent target band.

Economists at JPMorgan on Monday said it was now more likely the RBA would lift interest rates by another half percentage point in both July and August, following that up with a quarter percentage point increase in September.

Senior economist Ben Jarman said Dr Lowe’s interview last week suggested the bank was keen to get the official cash rate back to 2.5 per cent more quickly than had been expected.

“Our call has similarly argued for the cash rate to approach 2.5 per cent but, given Dr Lowe’s increased confidence, the path to the destination should be faster,” he said.

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