We currently have parts of the housing market breaking all sorts of records. Home loan interest rates on the other hand have already created history and in many aspects of the property market and the wider economy, continue to do so.
How much interest rates have fallen and for how long, sets interest rates as the most complex and significant driver of the residential property market, outperforming other elements of the market including supply.
However, Australian official cash rates, as managed by the Reserve Bank, are generally very stable. For instance, over thirty-two consecutive months between August 2016 and May 2019 rates remained at a steady 01.50%.
In October 2019 we saw a ‘first’ when rates started a long period of cuts falling below 1.00% to 0.75% for the first time ever.
As the 1% cash rate vanished over the horizon we would soon reach 0.25% in March 2020 and eventually 0.10% in November 2020. Home loan rates followed a similar if less precipitous route with some fixed-term rates now sitting comfortably below 2%.
The last time we saw cash rates above what today looks a daunting figure of 4%, was between April 2010 to May 2012.
It’s easy to understand why home loan interest rates grab so much attention. There’s a lot of money involved. In December 2020 the value of owner occupier outstanding loans was some $1.2 trillion, and the cash rate 0.10%, while back in 2011 the figure was $825 billion, and the cash rate was 4.25%.
The value of total housing loans (investor and owner occupier) in December 2020 was some $1.9 trillion.
In January 1959 the average home loan (variable) rate was 5% and today the average 3-year fixed-term rate is around 2%. Fixed-term rates were not common before 1990.
How the banks adjust their rates is also something that always attracts attention. The banks have traditionally secured a margin between 3.3% and 3.6% with some variations either side of these figures. Those margins have been under pressure for some years and this in part explains why the banks are looking to gain market share and even more so in the face of such low interest rates.
While this is a very brief summary of the interest rate environment, it is fairly easy to appreciate the impacts on the housing market among both owner occupiers and investors.
Perhaps one of the most notable facts is that fixed-term rates, up to 3-years, have never been lower. And as a result, the current demand for fixed-term rates is as high as 30%, as buyers look to lock-in the benefit of the lowest rates in history.
Recently published research showed fixed-term demand accounted for more than 31% of all new loans. This level of demand was the highest since December 2013 when the cash rate was much higher than today at 2.5%.
The growing popularity of fixed-term mortgages may be explained by a number of factors. Firstly, some lenders have cut the interest rates charged on fixed-term products, making the market very competitive.
Fixed-rates are also very attractive to homeowners who are looking for repayment security, and that is notable when the economy may appear uncertain as we recover from the impacts of the pandemic. The trend might also indicate that buyers are guessing that rates cannot really go much lower and may soon start to increase.
There’s already a more complex set of circumstances building around the rates applying to fixed 4-year terms. This appears to relate to tentative but slowly emerging signs that interest rates may soon start to move upwards, albeit slowly.
One factor is the worldwide government stimulus being deployed in the trillions of dollars mainly in the form of Covid-19 spending. Plus, there’s a huge amount of deferred spending (cash), again estimated in the trillions of dollars, cash that’s expected to possibly surge into the market as consumer confidence improves as the vaccines roll-out.
Bond markets are also responding as governments issue huge calls to fund liquidity in their economies. Central banks around the world including the RBA in Australia, have been supporting local banks with extra low-cost funds that may also soon end, creating more demand for wholesale funds from the banks.
Combined, all of these policy settings may soon see inflation re-emerge along with pressures on interest rates that will eventually reach into the cost of home loans.
Today all the news is very positive however, the RBA is always very cautious. Regardless interest rates always move around, both down and up and suggestions rates may not move significantly until 2024 are starting to look a little too optimistic.
While the Reserve Bank has repeatedly suggested there will be no rate rises till 2024, markets are slowly suggesting it may be sooner.
If economies generally stay on the up-side the interest rate cycle, according to some predictions, may start turning before Christmas. The rate and extent of any new rates cycle cannot be certain.
However, history appears to suggest gradual and measured steps with each rise around 25 basis points to the cash rate. Each increase would have a compound impact on home mortgage rates.
Predictions and forecasts of any kind are notoriously fickle, still it feels reasonable based on past events to conclude that we are close to or at the bottom of the interest rate cycle.
This may be one reason buyers and current owners are keen on what are attractive fixed-term home loan rates. This along with many predictions of still further strong house price growth to come appears to be driving demand even as we live in very unusual and changing times.
Interest rates do change all the time, and currently that may be soon. When they do change, the housing market may respond calmly or in unexpected ways. Only time and sentiment will tell.