Australia’s housing prices have stayed resilient over the past year despite rising rates, with home loan borrowers feeling the pain from high repayments amid cost of living pressures.
The stress on household finances has come into sharper focus at a time when economists are raising the outside chance of a 25-basis-point rate rise by the Reserve Bank at its next board meeting in August.
Given this context, the biggest question on the minds of Australian mortgage holders is: what is the outlook for home loan rates over the next year?
How High Are Home Loan Rates?
Australia’s central bank has ramped up its benchmark cash rate, starting from a record low of 0.1%, over a two-year monetary tightening cycle as it focused on controlling persistent high inflation that has eroded the value of household savings.
The cash rate has been at a 12-year high of 4.35% since November 2023. However, the increase has been steeper for home loan borrowers, economists say, because mortgage rates are actually at their highest level since the global financial crisis in 2008 and 2009.
Currently, variable rate home loans are available for between 6% to 8% for both owner-occupiers and investors. Fixed rate loans are available in a similar range, depending on the term of the loan.
Will Interest Rates Rise Further?
Australia’s consumer price index (CPI) stood at 3.6% in the March quarter, which was significantly down from its peak of 7.8% in December 2022. However, this is still some way off from the RBA’s targeted band of 2% to 3% inflation and the sluggish pace of decline has forced the central bank to hold its cash rate steady for the past seven months.
This in turn has prompted lenders to also hold home loan rates steady, with no relief for borrowers.
Worryingly, monthly inflation data over the past two months has been higher-than-expected at 4%, leading the market to speculate of a roughly 30% chance that the RBA could lift rates once more at the Board’s August meeting.
Eliza Owen, Head of Research at property data analytics firm CoreLogic Australia says any upward move by the RBA will likely be based on the quarterly inflation and unemployment figures due in late July.
“I certainly wouldn’t rule out an increase in the cash rate for August, just because the RBA have made it very clear that they’ve got an extremely low tolerance for a resurgence in inflation, and actually debated a rate hike in their last meeting,” she said.
How Are Borrowers Responding?
Despite high interest rates, the level of housing finance has remained higher than pre-pandemic years.
According to the latest figures from the Australian Bureau of Statistics (ABS), lending to owner-occupiers stood at $18 billion in May, well above the historic decade average of $15 billion a month. Lending to investors was at nearly $11 billion, also above the historic decade average of around $8 billion a month.
Housing market experts say part of this can be explained by low supply relative to demand. But what is also sustaining demand in the mortgage market is activity by higher-income borrowers, thanks to a tight labour market and substantial accumulated savings through the pandemic.
However, high interest rates have certainly had an impact. While overall housing finance is still higher than pre-pandemic levels, it has largely trended lower since peaking in early 2022. Total housing finance fell 1.7% to $28.8 billion in May.
CoreLogic’s Owen says lending in the mortgage market has remained prudent thanks to the high serviceability buffer in place since late-2021. That is partly why only more wealthy buyers are able to participate in the current market, with new buyers needing to show they could service a loan that is 3% higher than the current rate.
Consequently, buyers are also shifting to cheaper markets.
“The overall growth profile is steady, but underneath the headline figures it’s really the cheaper end of town that’s continuing to drive growth in housing values nationally,” Owen said.
Where Will Rates Head in the Next Six Months?
Short-term predictions for interest rates are currently poised in a delicate balance.
A section of investors and economists believe the RBA could raise rates one more time, but that decision will depend on the June quarter inflation and unemployment readings due later in July.
“If we do get that rate increase, we would expect demand to slow and it will probably be a bit of a negative demand shock to the market,” Owen said.
She points out that the rate of increase in home values is already slower compared to last year. National home values rose 1.8% in the June quarter, down from the 3.3% growth in the June quarter of 2023.
“There’s fragility to the demand side anyway, and I think if we get another increase in the cash rate and subsequently mortgage rates, it would probably further slow down the rate of housing demand,” she said.
On the other hand, if there is no rate hike, it could actually turn into a bit of a tailwind for market demand.
“Because of the very variable nature of Australia’s mortgage market, people are actually pricing in rate reductions when they’re out in the market at the moment,” she says.
“So there is an expectation that we’re getting closer to the other side of the rate hiking cycle, and people may be buying while interest rates are relatively high in order to benefit from long-term gains that come from a reduction in rates down the line.”
Where Will Rates Head in the Next 12 Months?
The view for borrowers is a bit more encouraging over a 12-month period.
“Hopefully, mortgage rates can move lower over a 12-month period based on the idea that the RBA can successfully get inflation back to target and start cutting rates,” Owen says.
“As it is, each of the major banks still see the next move in the cash rate to be a cut, but the timeline is blowing out a bit.”
Among Australia’s Big Four banks, which dominate the home loans market, economists at both Commonwealth Bank and Westpac currently expect the RBA to start cutting rates in November 2024.
Meanwhile, ANZ and National Australia Bank are more circ*mspect, forecasting for a first rate cut in February 2025 and May 2025 respectively.
The predictions are likely to be updated as more economic data is released over July.
Frequently Asked Questions (FAQs)
What is the current cash rate in Australia?
The RBA’s cash rate, which is Australia’s official benchmark cash rate, currently stands at 4.35%. A higher cash rate generally translates to higher interest rates on personal, car and home loans.
Will interest rates go down in 2024?
As of July 2024, CBA and Westpac expect the RBA to start cutting rates in November. However, ANZ and NAB are forecasting the first rate cut in February 2025 and May 2025 respectively.
Will we ever see a 0.1% cash rate again?
Australia’s cash rate dropped to a record low of 0.1% as part of the emergency settings put in place to stabilise the economy during the pandemic. Economists do not expect a return to a similar rate as part of the normal monetary policy unless there is some extraordinary, negative economic shock.
