Lenders tightening borrowing capacity!
Some of my locals have been asking me what is really influencing the downward price adjustments that we’re currently seeing play out it in the market?
Well, we’ve touched on a few reasons over the last few months but undoubtedly the measure having the biggest effect on the market are the recent interest rate rises (RBA driven to curb inflationary pressures) and specifically the fact that borrowers are having their borrowing capacity eroded by lenders pricing risk buffers from future upcoming interest rate rises into loan applications.
So if you can imagine, those buyers who were given loan pre-approvals from banks six months ago are for the most part no longer being offered even the same amount in their updated pre-approvals, even in some instances if their overall wages have increased.
ANZ senior economists Felicity Emmett and Adelaide Timbrell recently wrote: “The biggest factor driving prices lower is reduced borrowing capacity.”
Based on current cash rate projections, ANZ senior economists tip house price sales to adjust 18% lower over the course of 2022- 2023.
The graph above illustrates the effects of the corresponding changes in borrowing capacity for buyers in relation to rising cash rates.
Already finance housing data shows that the average size of new mortgages have been falling as a result of this tightening.
Thankfully, the liquidity buffers which banks put in place will help those owners that purchased over the latest 2020 – 2021 growth cycle and should keep arrears in check. But it is this reduction in maximum loan sizes that are having a considerable knock on effect in the market and placing downward pressure on prices.
As for where the neutral cash rate lies, i.e where the interest rate needs to be to support the economy at maximum employment whilst still keeping inflation within an acceptable bandwidth only time will tell.
* This information is general in nature and not intended to be financial advice.
* Reach out to myself or my team at Meridien Realty for the best real estate assistance and expert advice on what’s happening in your local market. Whether you’re looking for a top selling agent or professional property managers to rent your property you can rest assured we’ve got you covered with the best advice.