Mortgage serviceability a test in 2023

The past 12 months in Australian property markets have been a shock for many borrowers, particularly those who jumped in on record-low interest rates upon the advice that rates would not move until 2024.

The 2022 year ends with interest rates at 3.1 per cent, as the Reserve Bank of Australia (RBA) tries to deflect inflation that hit 6.9 per cent.

The impact of interest rates on Australia’s property market was relatively immediate, with buyers’ interest waning, housing affordability worsening, and property prices dropping.

Since the first interest rate rise, national dwelling values have fallen by -7.0 per cent, which is equivalent to a fall in the median dwelling value of approximately $53,500, to $714,475, according to CoreLogic.

However, national values eased towards the end of the year at 1 per cent in November, compared to 1.6 per cent fall in August.

CoreLogic’s economist, Kaytlin Ezzy, said although declines have been slowing, further rate rises are anticipated in the early months of 2023, which could cause the rate of decline to pick up speed once more.

Indeed, borrowers have some reprieve in January, as the RBA does not meet, but most economists expect the hiking cycle will continue from February.

“As we move into 2023, there continues to be a mix of headwinds and tailwinds for housing market performance,” she said.

“With expectations that the bulk of the rate tightening cycle occurred in 2022, housing value declines could find a floor.

“The extent of the floor in values could be further weighed down by mortgage serviceability risks, particularly for those rolling out of record-low fixed mortgage rates through the second half of year.”

According to ANZ’s housing report, capital city property prices are set to fall 18 per cent over the balance of 2022–23, before climbing by a modest 5 per cent in late 2024.

While interest rates have weighed heavily on the housing market, they are only one factor, with tax settings, banking regulation, population, income growth, and the responsiveness of new housing supply all making an impact.

Initially, rate hikes were a “shock to potential buyers” in 2022, but buyers have adjusted and are more mindful, according to Domain.

“Majority of rate rises are now behind and they could start to fall again by late 2023,” Domain’s economist, Nicola Powell, said.

Population and a limited supply pipeline will continue to weigh on our housing markets, Ms Powell said.

She added that a surge in immigration will initially put a strain on the rental market, but rising rents will make purchasing more attractive for strategic investors who focus on long-term fundamentals.

In addition, as 2022 created one of the greatest lifestyle shifts Australians have experienced, it has also “emphasised the importance of the home and our surrounding community”.

This has heightened our desire for more space, added security, the balance of life, the right amenities, education, sports facilities, and green space.

“The areas to watch will be the ones that offer the ultimate livability; they may be the ones that are gentrifying, offer a certain lifestyle or have easy access to everything,” Ms Powell said.

However, given the cost-of-living pressures that will continue this year, entry-priced homes and units are expected to hold firm, driven by affordability barriers of purchasing, first-home incentives, and deteriorating borrowing capacity steering demand to more affordable options.

Ms Powell said this will continue to reverse the record price gap that developed between houses and units during the 2020–22 price boom.

“Together with houses at the premium price point seeing greater falls, it’ll create opportunities for upgraders,” Ms Powell said.

Banks to review lending requirements 

Meanwhile, head of research at InvestorKit, Arjun Paliwal, has tipped the slowdown in lending could force banks to consider changes to their servicing. 

With home loan serviceability now calculated based on an 8–9 per cent interest rate, after APRA lifted its home loan buffers in 2021, many borrowers are being scared off or rejected.

Thus, he said: “The banks will need to find a way to bring borrowers back as borrowing capacity declines and shrinks credit up-take.

“Banks like NAB have already started the trend for investors through how they calculate rental income.”

[Related: 2022: A year unlike any other in property]