Interest rates could fall by the end of the year, major lender predicts
There’s good news on the horizon for stretched mortgage holders ahead of April RBA meeting
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Mortgage payments could ease as soon as the end of 2023, according to predictions by Australia’s largest mortgage holder.
Economists at the Commonwealth Bank expect rates to peak at 3.85 percent (0.25 percent above current levels) in May before easing off towards the end of the year. This comes ahead of tomorrow’s meeting of the Reserve Bank of Australia board, which is widely tipped to keep rates on hold for the first time in 10 months.
While the other three major banks – Westpac, ANZ and NAB – are all suggesting rates will not begin to fall until 2024, the CBA and NAB have made the most accurate predictions over the past six months.
Westpac predicts interest rates will peak at 3.85 percent in May, while NAB and ANZ expect two more possible rate rises in May and June, bringing interest rates to a peak of 4.1 percent.
The RBA has been using rises in the cash rate to drive down inflation, which has fallen from a peak of 8.4 percent in December 2022 to 6.8 percent in February, further strengthening the possibility of a pause.
Property data provider CoreLogic has just released its Home Value Index, revealing national home values increased by 0.6 percent in March, the first month-on-month rise since April 2022. Research director at CoreLogic, Tim Lawless, said low stock levels, tight rental conditions and greater demand from overseas migration were the most likely causes.
“Although interest rates are high and there is an expectation the economy will slow through the year, it’s clear other factors are now placing upwards pressure on home prices,” Mr Lawless said.
“Advertised supply has been below average since September last year, with capital city listing numbers ending March almost -20 percent below the previous five-year average. Purchasing activity has also fallen but not as much as available supply; capital city sales activity was estimated to be roughly -7 percent below the previous five-year average through the March quarter.
“With rental markets this tight, it’s likely we are seeing some spillover from renting into purchasing, although, with mortgage rates so high, not everyone who wants to buy will be able to qualify for a loan. Similarly, with net overseas migration at record levels and rising, there is a chance more permanent or long-term migrants who can afford to, will skip the rental phase and fast track a home purchase simply because they can’t find rental accommodation.”
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The insurance premium gap between flood affected and non-flood affected homes is significant
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Climate change is already affecting home values due to the impact of more severe weather events and rising home insurance premiums, and the cost of building is likely to rise as regulatory changes designed to enhance climate resilience alter building codes and zoning laws, according to a new report.
The National Housing Supply and Affordability Council describes climate change as an emerging trend that is raising the cost and complexity of supplying more housing. In its newly released State of the Housing System report, the council discusses how climate change is reducing the value of some homes when major weather events cause flooding or other natural disasters.
“The price differential between flood-affected and non-flood affected homes has been estimated to be up to 35 percent a year after a flooding event,” the report says. “Furthermore, the RBA estimates around 7.5 percent of properties are in areas that could experience price falls of at least 5 percent due to climate change by 2050.”
More than one million households are struggling to afford home insurance, and rates of non-insurance are increasing due to the cost. For example, the Australian Competition and Consumer Commission estimated that 40 percent of homes in Northern Western Australia were uninsured in 2020.
“Climate change is causing home insurance premiums to rise across Australia, adding to already elevated housing costs. Homeowners in areas considered at–risk of natural disasters are expected to see insurance premiums rise further or have difficulty obtaining insurance due to heightened risks.”
More frequent and severe weather events such as cyclones and bushfires, as well as coastal erosion and flooding from rising sea levels, present risks to housing safety. More than 3,000 homes were lost in the 2019-20 bushfire season, causing $2.3 billion in insurance losses. The report says the predicted direct cost of natural disasters to the economy and housing will be $35.2 billion per year by 2050.
Climate change and net-zero targets could raise the cost of building new homes, the report says. “Regulatory changes to enhance climate resilience will alter building codes and zoning regulations.
Developers facing higher compliance costs may have difficulties meeting updated standards, potentially delaying or reducing housing availability.”
However, the report says the increased cost of building a home with climate-resistant materials and eco-friendly features is more than offset by lower energy costs over a property’s lifetime. The current minimum energy efficiency requirements within the National Construction Code are estimated to deliver a household–level benefit-to-cost ratio of 1.37, according to the report.
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