I yesterday took a detailed look at Sydney house prices, which are crashing in response to the Reserve Bank of Australia’s (RBA’s) aggressive monetary tightening.
Today I turn my sights to Melbourne, which is experiencing a similar, albeit less severe, correction in house prices.
As illustrated in the next chart, Melbourne’s CoreLogic daily dwelling value index began to fall sharply days after the RBA’s initial 0.25% rate hike in early May:
Melbourne house prices have plummeted in response to RBA rate hikes.
Since then, Melbourne dwelling values have fallen by around 2.4%.
The median economist forecasts an official cash rate (OCR) of 2.85% by mid next year. If true, Australia’s OCR would rise another 1.5% from its current level.
The futures market remains even more hawkish, tipping a peak OCR of 3.5% by May 2023.
If either interest rate forecast came true, it would send Australia’s average discount variable mortgage rate soaring to 6.2% under the economists’ forecast (dashed red line below) and to 6.8% under the market’s forecast (solid red line below):
Mortgage rates tipped to soar.
Under either scenario, Australian mortgage holders would face a massive rise in repayments, which would plunge many borrowers into severe financial stress at the same time as house prices fall sharply.
Sydney and Melbourne are most sensitive to the RBA’s rate hikes because they are the most expensive housing markets with the most mortgage indebted households.
As illustrated in the next chart, the house price-to-income ratios for NSW (read Sydney) and Victoria (read Melbourne) are far higher than the other Australian jurisdictions:
Sydney and Melbourne the most expensive housing markets.
Sydney and Melbourne are also the nation’s most expensive housing markets relative to rents, as illustrated by their anaemic gross rental yields of 2.7% and 2.9% respectively, according to CoreLogic:
Sydney and Melbourne have the lowest rental yields.
Leveraged home owners in our two largest cities better hope neither the economists nor market is correct on interest rates, and that the RBA stops well short in its monetary tightening.
Otherwise they are facing huge lifts in mortgage repayments alongside the biggest house price bust in living memory.
