“It appears that the limited supply of available zoned land partly explains this result,” he said.
In capital cities, the price of the most expensive quarter of dwellings is more than 10 per cent lower on a six-month ended annualised basis, while the price of the least expensive dwellings is still close to 10 per cent higher.
The Reserve Bank has lifted rates by 2.25 percentage points since May, and markets are pricing the cash rate will reach 3.3 per cent by the end of the year, before peaking at 3.9 per cent in April next year.
Rates to rise
Dr Kearns also provided additional context around the central bank’s expectations for house prices.
In April, the RBA wrote in its Financial Stability Review that a 2 percentage point increase in interest rates would lower inflation-adjusted house prices by about 15 per cent over a two-year period.
Dr Kearns said the figure was not a forecast, and the effect of higher rates on property prices depended on how other factors such as incomes, population, household preferences and supply evolved.
“Rather, it was an estimate of how sensitive housing prices are to interest rates, assuming that all the other costs and benefits to housing don’t change with interest rates.”
Reserve Bank head of domestic markets Jonathan Kearns at the Summit. Renee Nowytarger
Dr Kearns said how long rates stayed elevated mattered for prices. If interest rates increased by 2 percentage points but then reverted to their initial level after a couple of years, the dampening effect on prices would unwind. If rates were permanently 2 percentage points higher, prices would fall by about 30 per cent, Dr Kearns said.
Dr Kearns said the 2.25 percentage point lift in interest rates had reduced a prospective buyer’s maximum loan size by 20 per cent, since borrowers are assessed against their ability to service an interest rate at least three percentage points higher than the current rate.
“And because the assessment rate also applies to any existing debt, the decrease in borrowing capacity is even larger for prospective borrowers who have existing debt, such as property investors,” Dr Kearns said.
However, only one in 10 borrowers take out a loan close to the maximum available size, so many prospective borrowers will not notice a reduction in borrowing capacity.
Dr Kearns said the RBA’s recent rate rises meant monthly payments on a new 25-year principal and interest loan were 25 per cent larger than before May, but a surge in fixed-rate mortgages meant not all borrowers were feeling the pinch.
“Currently, around 35 per cent of housing credit is fixed-rate debt, higher than the one-fifth that is more usual historically,” Dr Kearns said.
“These borrowers won’t face an increase in their interest expenses and loan payments until their fixed rate expires.”
Meanwhile, a “large share” of variable rate borrowers had also made excess payments into their redraw or offset accounts, which Dr Kearns said partly insulated them against the effect of higher rates.
“For many borrowers, these larger payments will mean that actual payments need not increase by the full amount of the change in required payments that result from the higher interest rate.”
