Rate rises reduce borrowing power by almost a quarter - report

Seven consecutive Reserve Bank official cash rate rises by November last year have slowed the property market right down, with the total of new housing lending falling 3.7%, the latest Australian Bureau of Statistics figures reveal.

The ABS Lending Indicators released on Friday, January 13, showed the total new loan commitments dropped for the 10th month in a row, down 3.7% to just $24.73 billion in new lending. This was 24.3% lower compared to a year ago

Lending to owner occupiers fell in November by 3.8% to below pre-pandemic levels for the first time, while lending to investors dropped by 3.6%.

Comparison site Canstar carried out its own analysis showing that borrowing power has fallen by almost one quarter (24%) since April, which it blames on rising interest rates and higher loan repayments.

The ABS Lending Indicators for November 2022 also showed the ongoing withdrawal of first home buyers from the market for the third consecutive month with the value of new lending to this buyer group falling by 5.7% in November to just $3.87bn.

The number of first home buyers was down by 5.5% with only 8,023 new buyers in market. This was a reduction of more than half (50.7%) of the number of first home buyers from the January 2021 high of 16,261 the ABS said

Canstar said lower borrowing capacity made it harder for first home buyers to get a foot on the property ladder. 

It’s analysis shows a solo purchaser with an average income of $92,030 has had their borrowing power reduced by $135,000 since April. A couple with a dual income of $184,060 has had their borrowing power reduced by $312,000 over the last 10 months. 

How borrowing power is affected by interest rate rises

Canstar said the rising interest rates and higher loan repayments had affected all borrowers, who were subjected to a 38% increase in home loan repayments from May to November, adding more than $800 to repayments on a $500,000 loan over 30 years or more than $1,600 on a $1 million loan.  

The additional cash rate rise in December saw these figures blow out to an increase of $888 for a $500,000 loan or up to $1,778 for a $1 million loan. 

Reserve Bank strategy to dampen market is working

The combination of higher loan repayments and reduced borrowing power is having the desired impact the Reserve Bank wants for the property market, said Canstar group executive Steve Mickenbecker (pictured above). 

“Reserve Bank rate increases are doing their job in slowing new lending and stalling the property market, with November lending down by 21.3% from April,” said Mickenbecker.

“Slower lending is yet to flow through to lower inflation and the 7.3% inflation rate for the year to November will have disappointed the Reserve Bank, making a further 0.25% increase in the cash rate likely in February.

Mickenbecker said higher loan repayments are draining household budgets.

“[This] will be stressing borrowers individually, but collectively will meet the goal to drive down household spending and take the steam out of inflation. Home lending is way down over the last 12 months across owner occupiers and investors, but has been most felt by first home buyers, with lending to this group down by 29.2%.”

First home buyer affordability falling

Mickenbecker said a first home buyer who could afford a $568,000 loan in April can now only afford to repay a $433,000 loan in November.

“With home loan repayments on a $500,000 loan up by $800 from April to November and a further $79 added in December, to reach $2,991 per month by the end of 2022, household budgets are under severe pressure.”

Refinancing at all-time high

The ABS Lending Indicators also showed that refinancing activity reached an all-time high in November of 9.1% but Mickenbecker said this was disappointingly modest relative to the magnitude of loan outstandings and in the face of such rapid interest rate increases. 

“Refinancing from the average variable rate of 5.67% into a lower rate loan of 4% can give repayment relief by cutting just over $500 from monthly repayments by making the switch,” he said.

Canstar’s top 5 lowest home rates