Even though the housing market seems to be stabilizing, there is a likelihood of a rise in mortgage arrears as borrowers grapple with increasing interest rates.
The forthcoming announcement of the inflation outcome for the June quarter will significantly influence the prospect of additional interest rate hikes in Australia. The existing elevated interest rates, coupled with a potential rise in August, could further suppress consumer sentiment, which is already mirroring lows observed during the Global Financial Crisis. Historically, consumer sentiment has been closely associated with housing market sales. Furthermore, the housing sector could face challenges if credit accessibility decreases, as potential borrowers are experiencing difficulty obtaining credit approval due to issues such as high debt-to-income ratios and smaller down payments.
The rebound in housing values is also affecting the decision-making process of the Reserve Bank of Australia (RBA). While the RBA does not directly aim to control asset prices, inflated housing prices could lead to extended inflation as homeowners perceive an increase in wealth, prompting more spending. Even though interest rates remained unchanged in July, signs of a potential slowdown in the housing markets’ recent growth since March have started to emerge. CoreLogic’s Home Value Index for June indicated a minor softening in national growth rates.
While there is a possibility of an uptick in mortgage arrears as borrowers grapple with elevated interest rates, Australia’s predicted unemployment rate of less than 5% should help keep a significant surge at bay. The housing sector continues to experience a supply shortfall, which is likely to uphold property values. Limited supply, alongside strong net overseas migration and tightened rental conditions, should help counterbalance the impact of elevated interest rates.
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