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Are rate rises the final nail in the coffin for home loan affordability?

Rate rises and home loan affordability

The recent decision to increase official interest rates has caused concern among homeowners – but according to Dr. Andrew Wilson, it’s not all doom and gloom.

In his latest monthly home loan report, Bluestone’s consultant economist is quick to point out that existing borrowers and buyers are in a good position to absorb the latest rate increases due to low unemployment and a record-level amount of savings.

Are house prices likely to plummet as predicted?

While we’re definitely seeing a reduction in house price growth, it may not be as dire as some of the predictions we’re hearing. According to Dr. Wilson, housing demand will likely be shored up by the return of mass migration, international students and new policies that are being brought in to assist first home buyers.

The current tight rental conditions are further proof of the fact that housing markets are undersupplied, with rising rents and record low vacancy rates luring investors into the market. These factors could offset the likelihood of a house price plunge.

What does the future hold for home loan affordability?

Compared to the February quarter, the Bluestone home loan affordability index stayed steady, just below the recent peak recorded in January, but above the long-term average.

However, it does look like affordability is on the way down, with the current annual decline of 16.9% the highest reported in the series. This is largely due to the strong house price growth over the last two years causing buyers to borrow more to keep pace with the market. High prices in combination with subdued income growth and flat interest rates have resulted in higher proportions of borrower incomes needed for loan repayments – we’re seeing this the most in NSW and VIC.

Going forward, while home affordability is expected to be affected by rising interest rates, the impact should be offset by rising wages generated by a strong economy, according to Dr. Wilson.

Property investment and refinancing both up again

Investor lending increased in all states over the first three months of 2022, with QLD showing the biggest increase – loans for investors were up by 92%. This is in line with expectations given the current rental market and the potential rewards this offers for investors.

Refinancing also continues to rise, showing the steepest increase since June 2021 as borrowers take advantage of the additional equity in their properties from recent rising house prices.

Want to know more? Read the full report here.

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