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Property sales and refinancing showing the impact of rapid rate rises

By Julie Toth - Chief Economist • 10 Mar 2023

Reserve Bank of Australia building

Today the Reserve Bank of Australia (RBA) announced its tenth consecutive increase of 25 basis points (bp) to the cash rate, taking it from 0.1% last April to 3.6% today. This is the fastest sequence of rate rises on record in Australia. Each rate rise is dramatically affecting all variable-rate home loan holders and a rapidly rising number of fixed-rate mortgage holders.

In response, more loan-holders are actively seeking refinancing options. PEXA’s Refinance Index of loan refinancing volumes continues to show high levels of refinancing activity in 2023, following a record high in December 2022 and a seasonal lull in January. PEXA’s Refinance Index in the week ending 7 March 2023 was at 166 points:

  • down by 3.4% from one month ago (seasonally adjusted), but up by 7.7% in unadjusted terms;
  • up by 18.5% from the same week in 2022 (seasonally adjusted); and
  • up by 67.5% from the same week in 2021 (seasonally adjusted).

PEXA Chief Economist, Julie Toth, said: “The RBA’s decision today brings the cumulative increase in the cash rate to 350 bp in less than a year, taking it to its highest level since 2012. The relatively immediate transmission of interest rate rises to variable mortgage rates is taking ever larger chunks of income away from variable-rate mortgage holders, who account for the majority of Australia’s home loan holders.
“In addition, the RBA estimates that more than 800,000 fixed rate loans are due to expire during 2023, as they roll off their typical 2 to 3 year fixed rate period. All of these fixed loans are being reset at a significantly higher cost. In some cases, falling property values may have altered the loan-to-valuation ratio during the fixed term, making a new loan more expensive and difficult to obtain.

“Rising rates are also reducing the maximum loan size that prospective home buyers are able to borrow for their first home, or their next home purchase. More than 75% of all property purchases in Australia require mortgage financing (including almost all first home buyers), so this reduction in maximum loan size is directly impacting both the average price and the number of properties that can be settled successfully.

“PEXA’s latest Property Insights Report confirms the ‘affordable housing’ segment of prospective buyers is feeling the pinch the most. The largest drop in settlement volumes in 2022 was for properties priced below $500,000. In New South Wales, the number of property settlements priced under $500,000 dropped by 34.8% in 2022 compared to 2021. In Victoria, it fell by 7%, while in Queensland it fell by 12.8%. This trend confirms that the effects of rising rates are being felt disproportionately by buyers seeking lower-priced homes, further exacerbating Australia’s pressing need for affordable housing.

“Looking ahead, the RBA continues to flag the possibility of further rate rises in 2023. The pace may slow however, with pauses between rises looking more likely as we reach the top of the current rate rise cycle.”

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