Analysis by Canstar shows that the borrowing power of home buyers has been significantly reduced by the five consecutive official interest rate rises since May.
Canstar estimates that a couple with a combined average income of $180,000 can now borrow $264,000 less than they could in April, when the official cash rate (OCR) was just 0.1%. Likewise, the borrowing capacity of single income earners has been cut by $115,000 since April:
Sharp reduction in borrowing capacity.
The reduction in borrowing capacity and the increase in mortgage repayments (see below table) in response to the Reserve Bank of Australia’s (RBA) aggressive interest rate hikes are the key reason why house prices have fallen so sharply across the nation.
Following this month’s 0.5% OCR increase, the average discount variable mortgage rate rose to 5.70%, which implies a 30% lift in mortgage repayments versus their level in April just before the RBA’s first rate hike:
Australian mortgage repayments have risen 30% from their pre-tightening level.
Borrowing capacity and mortgage repayments will be squeezed further, with this month’s monetary policy statement from the RBA noting that “the Board expects to increase interest rates further over the months ahead”.
The above tables illustrate why mortgage rates are the number one short-term driver of Australian house prices, and why the RBA’s aggressive interest rate hikes will push Australian house prices sharply lower.
Higher interest rates increase the cost of debt, reduce borrowing capacity and thereby stifle buyer demand. The equation is that simple.
If the bond market proves correct, and the OCR peaks at 4.15% mid next year (up from 2.35% currently), then Australian house prices will be headed for an unprecedented bust.
