Lower borrowing capacities the biggest challenge: PropTrack

The impact of rising interest rates is having a commensurate effect on how much money people can borrow property and that’s similarly affecting investors trying to ‘build to rent’, PropTrack economic research, executive manager, Cameron Kusher, has raised.

Speaking exclusively to Mortgage Business on the eve of the 6 December Reserve Bank of Australia (RBA) cash-rate rise — adding another 25 basis points (bps) for 3.10 per cent at least until 7 February 2023 — Mr Kusher delineated the almost dog-chasing-tail situation where home buyers are finding it harder to buy or build as are investors, too, because of rapidly decreasing borrowing capacities.

Giving context first, Mr Kusher said: “We are coming off an exceptional period of price growth throughout the pandemic. And … that’s not just an Australian thing — that’s something we’ve seen right around the world.

“That’s been driven by very low interest rates.

“The side effect of the very low interest rates is it all led to a big surge of inflation.

“After we’ve had those very low interest rates, after property prices have risen significantly, the Reserve Bank now has to lift interest rates aggressively to address the runaway inflation, so context is really important.

“According to our index, from the peak, prices are down so far 3.8 per cent, but they’re still up 30 per cent from where they were at the start of the pandemic, which we say is March 2020.

“They’d have to fall out almost 23 per cent just to get back to where they were at the start of the pandemic.

“Now, we are expecting prices to fall further — that’s because interest rates have gone up much sooner and much quicker than anyone was anticipating.

“As a result of that, borrowing costs have reduced dramatically.

“We think that the biggest impact on why borrowing capacity is now down about 25 per cent, so people simply can’t pay the same prices for properties that they were before interest rates started to rise.

“As interest rates go up it’s going to reduce [borrowing capacity] further, so if rates go up, say, another three times, 25 basis points [each], borrowing capacities will be down to about 30 per cent.

“And that’s the biggest challenge.”

Rental market impact and the investor

The lower borrowing capacity on one side of the mortgage equation is mirroring itself in the property investment arena.

As Mr Kusher explained, the rental market is really strong at the moment because there’s fewer first home buyers (FHB) and fewer investors.

“From an investment perspective, it makes a lot of sense at the moment to be looking to invest in residential property – [but] the challenge is their borrowing capacity has reduced so much that people [investors] can't borrow enough to get that additional property [to rent out],” he outlined.

“Longer term, though, we have seen that property prices have tended to rise.”

“We've got a growing population; we know that migration is ramping up very quickly into the country, [and it’s a] very centralised country as well with most of the jobs in Sydney, Melbourne and in other major capital cities less so.

“That's going to continue to drive demand for housing in those markets,” he said encouragingly.

“But certainly, if we look at what happened over the past 30 years we've had this ongoing step down in interest rates.

“We've had more women joining the workforce, we've had credit availability freed up quite dramatically – and that’s driven property prices.

“Going forward interest rates basically can't go any lower than they have.

“We're not going to have those same drivers, so I would expect that price growth will be slower than it has been, but there is still going to be really great opportunities for people to buy [and] also for people to invest in residential property,” Mr Kusher explained.

The outlook ahead at this stage

PropTrack’s expectation of future rate rises “changes a little bit every month”, Mr Kusher highlighted, but said he expected the December cash-rate 25-bp jump and that “there won't be one in January because they don't meet; in February we probably get another interest rate hike and then maybe one in March,” but that would be “probably about the peak of the cycle.”

“Equally, if some of the metrics deteriorate over the next two months, as we get that data in and the RBA doesn't meet, maybe they might pause it even earlier than that,” he said

“We've already started to see property prices fall, company profits were down quite a lot [when] the ABS [figures] came out.

“We're seeing lending slowing very dramatically.

“We started to see retail trade slow and I think what really the Reserve Bank is looking for is for households to start showing a little bit more restraint in their spending,” he concluded.

“If they responded to that then that should result in less of a necessity to put up interest rates,” he said.

[Related: ‘Ho, Ho ... oh no!’ RBA announces December rate rise]