Mortgage rates to fall
The inflation figures have been
considerably softer over the past six months, to the extent that market pricing is for an interest rate cut as soon as next month (approximately 95 per cent priced in).
The private sector of the economy has basically been in recession - and the national economy is in recession, on a per capita basis - but the government has been dropping some pretty heavy spending, and a surge of hiring across non-market sectors means that the unemployment rate is still low, at only 4 per cent.
Therefore, although interest rates are expected to fall over the next 12 to 15 months, there's only about 90 basis points of easing priced in for this cycle.
Source: ASX
Falling interest rates have nearly always proven to be bullish for Aussie housing, but what does this mean for the property market in this cycle?
3 property market impacts
Firstly, the fact that interest rates are likely now heading down instead of up should have a positive psychological bearing on market sentiment.
Most households are managing just fine, but so too are plenty feeling the effects of
mortgage stress, and some relief will be welcomed.
Secondly, despite considerably lower rates of inflation, borrowers shouldn't expect to be paying ultra-low mortgage rates again any time soon.
A borrower paying a mortgage rate of 6½ per cent on a loan today might expect to find a rate on a similar mortgage deal of around 5½ per cent about a year from now...but perhaps not much lower than that.
Borrowing capacities should increase over the next year as interest rates fall and incomes increase, but for the time being the market regulator still has a 3 percentage points assessment buffer to protect borrowers from rising interest rates (which aren't actually rising, by the way, but that's a debate for another day!).
Indeed, anyone who's gone through the stringent process of applying for a mortgage in recent times knows just how laborious the exercise has become, even though the macro environment for lending is totally different from the previous cycle.
Only 11 per cent of loans by value are now on interest-only terms, versus 39 per cent in 2017, for example, while the perceived riskier lending cohorts have been strangled significantly since a decade ago.
Thirdly, this might prove to be the fillip that's need to help developers gain confidence to kick off more medium-density and higher-density projects in 2025.
Insolvencies across the sector ran very high in 2024, while higher borrowing and steepling materials costs made developing new medium-density projects in the larger capital cities often unviable.
But we're through the nadir for the construction cycle, and housing starts should begin to lift as this year rolls on.
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