The impact of successive interest rate rises continues to bite with housing finance declining 3.7% in November or 24.3% on an annualised basis. The increase in interest rates makes the cost of servicing loans more expensive for households, reducing their ability to spend on other things, which reduces demand and prices.
As the chart shows, almost the moment interest rates began to rise, the total annual value of loans began to decline and were quickly in retreat.
If thrusting money at first home buyers is a form of recidivism for Treasurers and Finance Ministers, then lifting interest rates is recidivism for central bankers. In the modern, sophisticated and fast moving economy, there are observable limits to what is known as monetary policy.
Some of the key criticisms of monetary policy are:
- Time Lags: The effects of monetary policy on the economy can take time to materialize, making it difficult for policymakers to effectively respond to specific economic conditions, and feedback can be misinterpreted;
- Ineffectiveness in a liquidity trap: In a liquidity trap scenario, interest rates are near zero, and monetary policy loses its effectiveness in stimulating the economy, and that feels a lot like the experience of the last few years;
- Uncertainty: The impact of monetary policy on the economy can be uncertain and difficult to predict, leading to potential unintended consequences;
- Income and Wealth Inequality: Monetary policy can have disproportionate impacts on different segments of the population, contributing to income and wealth inequality;
- Political Interference: Central banks operate independently, but in some countries, the decisions they make can be subject to political influence and pressure, potentially compromising their ability to achieve their goals.
The impact of rising interest rates (the blue line) is clear in the chart below, as is the ratio of housing interest payments to household disposable income on the red line. At December 2022, the ratio was at 6.0%, while the interest rate was up to 3.1%. It is important to note the disposable income ratio lags the interest rate rises – and that’s an example of the potential limits of monetary policy as an economic corrective tool.
Reflecting the increased size of mortgages, the ratio is the same level as in March 1990 when the official cash rate was a stonkering 17%.
However, this is a macro view which takes into account all households and all mortgages.
If we examine mortgage serviceability on a median income household basis, CoreLogic estimates that in June 2022, a household needed 44% of income to service its repayments, which is the highest level since June 2011.
Source: ANZ Housing Affordability Report, Corelogic
The ratio – and household ability to service loans – will only become more challenging if interest rates move higher as part of an attempt to address inflationary pressures, as we discuss elsewhere in Stats Count.
Reflecting these affordability issues, plenty of borrowers were shopping around for a new loan over the last few months. In addition – and this could be more serious – many borrowers who took advantage of low fixed interest rate loans that were offered as a stimulus during COVID lockdowns now need to roll those facilities over. Most will be shuffled to loans with interest rates at (mainly) higher rates.
That is likely to increase the median ratio of loan repayments to household income even further.
As a consequence of rising interest rates and the end of the ‘honeymoon’ fixed interest rates, these factors combined to push refinancing for November 2022 to record levels, reaching $19.5 billion, up 8.2% on the previous month.
As the AFR’s Ronald Mizen noted, at the same time as refinancing hit record levels, the total number of new home loans fell to pre-pandemic levels for the first time in November.
Greg Jericho, writing in The Guardian, confirmed this was normal behaviour and to be expected given the interest rate rises. That is, finance volumes will fall when repayments are going to be higher.
Interestingly, Jericho points out that as a result of reduced total housing finance, the price of dwellings will continue to fall. The chart here demonstrates the relationship between housing finance and dwelling prices, noting the three month lag he has applied to housing finance growth.
We suspect that means when there is less liquidity, there is reduced competition on prices. As Jericho puts it, that is evidence the interest rate rises are working. His view is there is no call for further increases, as a result.
Delving into the latest ANZ Housing Affordability Report, which is prepared by CoreLogic, it is difficult to avoid a focus on the other factor that will weigh on households that are already invested in the market: existing property prices are in retreat right across the nation, just as Jericho expected. The largest falls in the June quarter of 2022 were recorded in Sydney (-2.5%) and parts of Melbourne (-1.6%).
While that can hurt, the good news from that data is the average number of years it will take to assemble a 20% deposit is coming down. That’s helpful for an economy where housing appears over-priced and it can take a calculated 25.9 years to save a deposit in the most expensive suburbs!
