October 18, 2023 by Dymphna

Official: Property has cleared the last hurdle

Well, looks like we were making a mountain of a mole hill

There is really nothing holding the property market back now.

One of the mysteries in recent years was how we managed to digest 400 basis points of rate hikes with barely a blip in the property price data.

If I had told you two years ago we were about to get 400 basis points of rate hikes in 18 months, most economists would have told you that property prices would fall by 20% or so. Maybe more.

But that didn’t happen.

Prices came off a little – maybe 8% or so. But then they bounced back and they’re currently storming on to record highs.

Right now, it looks like the net effect of 400 bips = zero.

It was a puzzle.

But then some economists looked at it and said that maybe what happened is that everybody fixed their interest rates during Covid at those super low rates, and the full impact of the rate hikes wouldn’t be felt until those fixed rates started to roll over.

This gave us the concept of a “fixed mortgage rate cliff”.

And that cliff was set to peak in the middle of this year, and roll on through the rest of the year.

Well, it’s happened. And the market barely noticed.

Previous much-hyped concerns that people rolling off cheap fixed rate home loans could be caught up in a wave of defaults and mortgage arrears have so far proven overblown.

Banks issued about $400 billion of fixed rate mortgages in 2020 and 2021.

The stock of housing credit outstanding with fixed rate loans doubled to almost 40 per cent and the flow of fixed rate home loans was even higher.

Now, about half of the loans by value have rolled off onto higher interest rates, with the vast majority of borrowers opting for variable-rate loans.

The peak of the roll-off passed in the June and September quarters. Most of the remaining cheap fixed rate loans will expire over the next 12 months.

“The majority of current fixed-rate borrowers are estimated to have sufficient income to continue meeting their obligations after moving onto higher mortgage payments,” the RBA notes.

“The majority also have large savings buffers,” the review says.

That’s the word from the RBA’s Financial Stability Review.

Which leaves me asking the question, what’s holding the market back now.

Immigration is strong, vacancies are low, rents are rising, and the next move in interest rates will probably be down.

If a mortgage ‘cliff’ couldn’t stop the market, then what possibly could?

Maybe if we saw a large increase in unemployment, but its hard to see where that would come from in the near future. 

Nope. It’s onwards and upwards from here.