Buying power not cost pressure to hit housing

In the meantime, the decline in housing prices is not due to rising distress for borrowers but rather reflects lower borrowing power.

Over the next 18 months or so, when a borrower seeks a loan, they will be assessed at a higher interest rate than before, and with higher living costs. That translates to the maximum amount they can borrow being lower – and that means house prices will fall back as people have less to spend.

Meanwhile, higher cost of living pressures also play into how much people can borrow and hence how much they can pay for a house.

It's not that we expect to see a lot of houses coming up for sale because of people not being able to afford their mortgages.

People are still looking to buy homes. With such a strong labour market, there are lots of willing buyers who have jobs and we expect better pay rises than what we’ve seen in recent years. But they still won’t be lent what they might have been lent even six months ago.

So at an auction, for example, bidders will have a lower maximum price they can pay.

The figures we look at are of course averages and there are different situations in different cities. Sydney and Melbourne house prices tend to be the first to decline but then the first to turn back up again.

But when we look at other large cities in Australia such as Brisbane and Perth, house prices will fall more slowly, and are still likely to be more expensive at the end of this year than they were at the beginning.

Another particular factor, as the Reserve Bank raises interest rates in this cycle, is the number of fixed rate loans taken out when interest rates were cut sharply at the start of the pandemic.

When those rates fell, borrowers locked in very low rates. But many fixed rate loans are “fixed” for three or four years and when they mature they will roll into higher rates, whether fixed or variable.

Almost half of the current fixed debt will roll over between June 2023 and June 2024. That's when we will start to see the full household cashflow impacts of these rate rises.

This period of time also represents the most risk when it comes to arrears, that is people falling behind in repayments.

The expected increase in the cash rate to 3.35 per cent by the end of this year will significantly lift household interest payments. Total repayments are also set to rise sharply, with over half of payments on fixed rate loans rising by over 40 per cenbt once the fixed rate expires.

Despite these large rises, we know debt is concentrated among high income households - who are more likely than others to have large savings buffers and more income to cover inflation and interest rate changes.

That is, the people with the most debt are also the people with the biggest offset balances which cushion some of the falls in housing prices.

And that reduces the risk people will have to put their house up for sale due to those rising interest rates.

Adelaide Timbrell is a Senior Economist, ANZ Bank