Grim Warning for Aussie Homeowners: Rate Relief Still Distant

By Robert Heyward

Australian homeowners facing mortgage stress may have a longer wait for relief, with a leading industry forecaster warning that interest rate cuts could still be many months away. Oxford Economics Australia predicts the Reserve Bank of Australia (RBA) won’t begin cutting rates until the second quarter of 2025, far beyond the late 2024 cut expected by other forecasters, including the Commonwealth Bank.

“Given the RBA’s hawkish rhetoric, we don’t see rate cuts coming until Q2 2025,” said Sean Langcake, head of macroeconomic forecasting at Oxford Economics Australia, ahead of the firm’s biannual economic outlook. Langcake points to “strong cross currents” in the economy as the reason for the delayed cut, with policymakers navigating a “challenging” environment.

He noted that the labour market’s resilience is testing the RBA’s cautious approach to curbing inflation, while a significant easing of fiscal policy is providing a boost to the economy, potentially complicating efforts to keep inflation in check.

Despite the RBA’s efforts to lower inflation to its target range of 2-3 per cent, Langcake expects headline inflation to remain high at the end of 2024. However, he warned that subsidies for utilities, which have contributed to disinflation, may cause the RBA to overlook the headline data.

RBA’s Tightening Cycle and Homeowner Struggles

The RBA implemented an aggressive rate tightening from May 2022 to combat rising inflation, lifting the benchmark cash rate from 0.1 per cent to 4.35 per cent by November 2023. Although the rate has been on hold since then, RBA Governor Michele Bullock has emphasised that any future cuts will require significant changes in inflation trends.

“We’ve seen from overseas experience how bumpy inflation can be on the way down,” Bullock said after the Board’s August meeting. “What we can say is that a near-term reduction in the cash rate doesn’t align with the board’s current thinking.”

The series of rate hikes has placed immense pressure on homeowners, many of whom are struggling to keep up with increased mortgage payments. According to RateCity, monthly repayments on a $500,000, 30-year mortgage have risen to $3,105 as of June 2024, compared to $1,989 in March 2022—an increase of $1,116 per month.

Worryingly, the value of home loans in arrears (30 to 89 days behind on payments) has surged, rising to $14.9 billion by June 2024, up from $5.9 billion in March 2022, according to APRA data. Laine Gordon, money editor at RateCity, acknowledged the growing financial strain on some Australian households: “Despite record high levels of savings, some families are dipping into their savings to keep up with rising cost-of-living pressures.”

However, Gordon emphasised that non-performing loans still represent a relatively small portion of overall credit, accounting for just 1.03 per cent of all outstanding loans in the June 2024 quarter, up slightly from 0.91 per cent pre-COVID.

Australia’s Inflation Battle

Australia’s inflation fight contrasts with that of other major economies, such as the United States, where the Federal Reserve is widely expected to cut interest rates in the near future. The Commonwealth Bank still expects the RBA to begin easing rates in late 2024, although it acknowledges there is a risk that rate cuts could be delayed until early 2025.

“We remain of the view that softer economic data, a further deceleration in inflation, and the easing of monetary policy by many other central banks will see the RBA begin to cut interest rates later in 2024,” the Commonwealth Bank’s latest report states, though it notes a possible start date in early 2025.

As homeowners continue to grapple with rising costs, the outlook for interest rate relief remains uncertain, leaving many Australian households bracing for prolonged financial pressure in the months to come.

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Fixed-Rate Home Loans: A Short-Term Gain, Long-Term Pain?

Robert Heyward

 The recent round of fixed-rate home loan cuts from major Australian banks may seem like an attractive option for prospective homeowners, but experts caution that these offers may not be the long-term solution many hope for. As the market continues to grapple with high inflation, rising interest rates, and sluggish wage growth, affordability in major cities remains a significant challenge.

While concerns about further rate hikes eased after the Reserve Bank of Australia (RBA) held rates steady at 4.35% earlier this month, banks such as Westpac, National Australia Bank, Commonwealth Bank, Macquarie, and HSBC have all slashed fixed-rate mortgage offers. This has prompted renewed interest, though demand for fixed rates remains low. According to Mortgage Choice, only 3% of home loan submissions in August had a fixed component, with variable rate loans continuing to dominate at 97%.

Fixed-rate home loans, popular with first-home buyers, allow borrowers to lock in a repayment rate for one to five years, offering financial stability. In a competitive market, banks are eager to attract customers with fixed-rate products, hoping to secure long-term borrowers. This uptick in competition is a positive sign for homebuyers and those refinancing.

Luke Camilleri, a Mortgage Choice broker based in Sydney, sees the cuts as an opportunity to reintroduce fixed-rate options to clients. “For the past two years, fixed rates have rarely been part of the conversation,” he says. However, he also warns that it may be premature to embrace fixed rates wholeheartedly. With the RBA yet to cut rates, it’s unclear how the market will evolve over the next 6 to 12 months.

Economic Uncertainty Clouds Long-Term Prospects

Although the resurgence of fixed-rate products is beneficial for short-term planning, the long-term outlook remains uncertain. Anne Flaherty, a senior economist at PropTrack, points out that while lower fixed rates from banks may signal expectations of future RBA cuts, there is no guarantee. As such, locking in a longer-term fixed rate now may carry financial risk if variable rates fall in the future.

Mr. Camilleri echoes this sentiment, advising clients to limit fixed-rate terms to two years at most. “It’s not ideal to commit to a long-term fixed rate right now,” he says, urging homebuyers to consider the possibility that their variable rate could match or drop below their fixed rate, avoiding the long-term commitment to potentially higher payments.

Fixed Rates: Comfort Over Cost?

Despite the risks, some borrowers are still drawn to fixed-rate options for the certainty of fixed repayments, regardless of where the market heads. “People choose fixed rates not necessarily to ‘win’ on the interest rate, but for the security,” says Camilleri.

While long-term fixed rates remain a gamble, short-term fixed rates could offer a temporary win for those looking to hedge their bets. Flaherty notes that many banks are currently offering one-year fixed rates lower than variable rates, providing homeowners with short-term savings while maintaining flexibility for the future.

Ultimately, while fixed-rate home loans may offer immediate relief, the broader market landscape suggests they may not be the best long-term strategy. First-home buyers and refinancers should remain cautious, weighing their options carefully before locking in a rate in this unpredictable economic climate.

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Australian Home Values Hit Record $10.9 Trillion, with Every State Except One Seeing Gains

Australia’s housing market surged by $225.9 billion in the June quarter, pushing the total value to an unprecedented $10.9 trillion. New figures from the Australian Bureau of Statistics (ABS), released on Tuesday, reveal that the national average home price increased by $15,600 to $973,300 during the three months to June. However, while most states enjoyed substantial windfalls, one state saw a decline.

The continuous rise in home prices is deepening the affordability crisis for prospective buyers, with home values growing faster than many can save from their paychecks. “The cost of housing continues to rise even as interest rates remain at a 12-year high,” said Cameron Kusher, Director of Economic Research at PropTrack, in an interview with realestate.com.au. “This is making homeownership even more difficult to achieve for many.”

For current homeowners, however, the climbing property values are seen as a positive development. “Those who already own properties are generally pleased to see their equity grow,” Kusher noted. Nonetheless, the ABS data points to a slowdown in the rate of price growth across the country, aligning with broader trends tracked by the PropTrack Home Price Index.

Some of Australia’s smaller states witnessed the most dramatic price increases. In Western Australia, the average home price jumped by a staggering $47,700 to $816,000 in just three months—equivalent to an increase of over $500 per day. Kusher attributed this to strong demand coupled with a limited supply of available homes. “There’s a desperation among buyers, driven by fear of missing out, as they worry that waiting longer could mean paying significantly more,” he explained.

South Australia and Queensland also saw robust growth, with home values rising by $32,400 to $800,400 and $30,500 to $885,400, respectively.

Meanwhile, New South Wales saw more modest gains, with the average home price increasing by $11,500 to $1.222 million. Victoria, however, was the only state where home prices fell, with the average price dropping by $6,600 to $900,300 during the same period. Kusher explained that Victoria’s market has been flooded with properties, reducing the urgency for buyers. “Unlike in WA, buyers in Melbourne don’t feel the same level of pressure. With ample stock available, they are willing to wait, hoping for better deals,” he said.

Other regions saw moderate growth in home values. In the ACT, prices rose by $7,600 to $953,900, while Tasmania saw a smaller increase of $3,600 to $672,600. The Northern Territory remained the most affordable, with a $7,600 increase bringing the average price to $538,000.

Looking ahead, Kusher expects home values to continue rising into the September quarter, though at a more gradual pace. “The rate of growth is slowing as more stock comes onto the market, but we anticipate further increases, albeit at a more moderate rate,” he said.

With the housing market showing no signs of cooling off, the ongoing affordability challenge and Australian Home Values remains a major concern for those looking to break into the property market.

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