Superficially, it appears Australia’s house price correction may already have ended.
PropTrack’s dwelling values index recorded a 0.2 per cent rise in February, which follows January’s 0.1 per cent increase.
Capital city dwelling values rose 0.3 per cent over the two months to February, whereas the combined regions increased 0.2 per cent, according to PropTrack.
The surprise rebound in dwelling values came despite another 0.25 per cent interest rate hike from the Reserve Bank of Australia (RBA) in early February, which took the official cash rate (OCR) to 3.35 per cent – its highest level since September 2012.
For now, it appears a dearth of property listings, record overseas migration and record rental increases has created enough “fear of missing out” to offset the ongoing rise in mortgage rates.
The house price correction will reassert itself
The rebound in house prices looks like a classic ‘dead cat bounce’, and the home price correction will soon reassert itself.
First, the RBA moved to a more hawkish stance at its February monetary policy meeting, stating “the Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary”.
The RBA also said that it was “resolute in its determination to return inflation to target and will do what is necessary to achieve that”.
Therefore, the RBA is all but certain to hike again next week, with additional rate increases very likely over following months.
Indeed, Westpac last week lifted its OCR forecast to a peak of 4.1 per cent, while financial markets are tipping a 4.25 per cent peak in the cash rate.
Mortgage borrowing capacity has already contracted by one third following the RBA’s 3.25 per cent of rate hikes. And further increases in the OCR will shrink borrowing capacity even further, pulling house prices lower in the process.
Fixed rate mortgage cliff approaching
Only a portion of the RBA’s 3.25 per cent of monetary tightening has been felt by mortgage borrowers.
According to RBA estimates, around one third of all home loan borrowers are on fixed rates, many of which were originated at rates of around 2 per cent.
This year, nearly 900,000 borrowers, or 23 per cent of Australia’s total mortgage book, will switch from cheap fixed rate mortgages originated over the pandemic to variable mortgages with rates more than double current levels.
KPMG’s economics team recently estimated that a household with a $600,000 mortgage will face a $16,500 increase in their annual repayments when they switch from a fixed-rate loan to variable rates in 2023.
Mortgage rates have already risen beyond 3 percentage points for many borrowers, which is the minimum serviceability buffer required by APRA in assessing whether someone can repay their debt.
Therefore, as the RBA hikes further, borrowers will be pulled deeper underwater.
Indeed, the RBA’s stress-testing in 2022 found that if the OCR were to rise to 3.6 per cent, approximately 15 per cent of all borrowers would have negative free cashflow. That is, their incomes would not cover their mortgage repayments and essential living expenses.
This fixed rate “mortgage cliff” is, therefore, a major risk to Australia’s housing market and will very likely see a material increase in forced sales, which will pull house prices lower.
Unemployment to rise
Compounding the above forces, the economy is weakening and unemployment is likely to rise significantly over 2023, making it even harder for Australians to meet their mortgage repayments.
The December quarter national accounts, released this week, was a reality check for Australian households.
GDP in per capita terms – i.e. after adjusting for population growth (immigration) – was dead flat in the December quarter, which follows the September quarter’s anaemic 0.1 per cent growth.
Worse, domestic final demand (DFD), which gauges domestic activity by stripping away the impact of net exports, was dead flat in the December quarter and actually fell by 0.5 per cent in per capita terms.
This followed flat (0 per cent) per capita DFD growth in the September quarter.
In short, the per capita economy is already teetering on recession, with the aggregate economy saved only by strong population growth via record immigration.
The driver of the economic slowdown is household consumption, which grew by only 0.3 per cent in the December quarter and fell by 0.2 per cent in per capita terms.
Household consumption is the main driver of the Australian economy and where it goes the economy typically follows.
This slowing in household consumption came despite a sharp fall in the household savings rate to just 4.5 per cent in the December quarter, down from 7.1 per cent in the September quarter.
The last time the household savings rate was this low was September 2017.
With inflation running rampant, the average compensation of Australian employees has fallen sharply in real terms, slumping to 2012 levels.
Basically, households are dipping into their savings to maintain spending in the face of falling real wages and increasing interest repayments following the RBA’s aggressive interest rate hikes.
Looking ahead, it is clear household consumption and economic growth will fall further in 2023 as the RBA continues to tighten.
This tightening, in turn, will result in a consumer-led recession for Australian households, at least in per capita terms.
Unemployment will inevitably rise on the back of record immigration (labour supply growth) and the slowing economy.
So too will defaults and forced sales, which will pull house prices lower.
Because you can’t pay your mortgage if you lose your job.
Leith van Onselen is co-founder of MacroBusiness.com.au and Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.