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The impacts of low interest rate on the housing market

Super low interest rates that will remain for at least another three years, has sustained the rise in house prices across NSW. On Tuesday's monthly policy meeting, RBA decided to have rates remain at the historic low of 0.1%, with its governor remaining firm on the strategy of keeping rates low until actual inflation returns to being between 2-3%, which is unlikely to occur until 2024. However such a decision is being questioned especially following the Monday's data release revealing that Australian home values have risen by 2.1 percent across the board just in February alone with cities like Sydney and Hobart leading by 2.5%. This growth is also reflected in how home loans have risen by 10.5 percent reaching $29 billion which represents a 44.3% since February 2020.

In response to such growth, many economists are forecasting a faster than expected recovery of the market forcing the RBA to accelerate their first rate hike to sometime in 2023 or even late next year. Another factor contributing to the pessimistic outlook of these analysts is the Government's recently proposed plan to loosen responsible lending to aid COVID recovery. This would remove lender responsibility regarding borrower repayment capability and place it entirely upon borrower. Half of the experts on Finder’s interest rate panel believe such changes to the lending law will pose problems to the greater economy, with some citing this causing a repetition of the 2008 housing bubble. They posit the eventual recovery of rates will trigger a mortgage arrears time bomb.

However, there is a significant difference between the two circumstances as the 2008 housing bubble were driven by investors comparatively the current price surge is driven by owner-occupiers, especially first home buyers, evident from the figures released by ABS this week, where the total value of owner-occupier loans rose 10.9% in January to $22.11bn, which is a rise of 52% on the same time last year. The amount of borrowing arranged by investors did not rise as much but it was still up 9.4% to $6.54bn. That is a 22.7% increase compared with last January and nearly all of that gain has come in the last three months, according to analysis by Westpac.


Overall future outlook for the housing market remains optimistic, until owner occupier are overtaken by investors, likely followed by RBA beginning to step down on the brakes. However, buyers should remain cautious as commonly used methods of assessing home loans regarding interest coverage ratio may be inaccurate as rates increase in the future. KBRZ offers a potential solution to this problem through our refinancing services, by enabling our clients to better respond to the changing economic environment through our tailored products and fast approval process to ensure the long term profitability of their investments.

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