There is little evidence house prices will fall

Those expecting the housing prices to “fall off a cliff” are actually ignoring a number of fundamentals, such as unemployment rates at historic lows and high household savings, Datt Capital’s analysis said.

According to the firm’s study of residential property market dynamics, the rapidly rising cash rates flowing through to higher mortgage rates would not stress borrowers to the extent where they would need to sell their homes or housing investments.

“There is no denying that higher mortgage rates will affect the serviceability of loans within certain borrower segments. But we believe it’s unrealistic to extrapolate that experience across the broader market,” Datt Capital’s principal, Emanuel Datt, said.

“The Australian Bureau of Statistics measures housing loans at the application approval stage, excluding refinanced loans. This factor ultimately exposes a bias towards those borrowers who are likely to be changing homes or churning investment properties, adding a skew towards this risk-loving borrower segment. The reality is far more bland, in our opinion.”

The average holding period for Australian housing was just over 11 years per property and the average effective loan-to-valuation (LVR) ratio for housing with a vintage of 11 years was circa 45%, with an average LVR across their book of around 50%.

“This is very low given mortgage insurers typically insure lenders against these higher-risk borrowers. This is from a sample size of 1.12 million loans or about 20% of residential loans outstanding,” Datt said.

According to a more holistic view, the rate of housing starts was falling given the disruptions to the construction industry, tightening the availability of inventory available on the market, meaning that any distressed selling was likely to be on the market for a shorter time at the right price point.

On top of that, the historically low unemployment rates with increased upside pressure on wage growth would be supportive as wage growth would be balanced out by more onerous serviceability requirements with future interest rate rises.

Also, household savings rates and balance sheets improved materially since March 2020, buoyed by government stimulus as well as restricted discretionary spending on travel for a relatively long period of time.

“Taking these savings into account, the ratio of household credit to income is lower than the headline figure of 150% and is actually around the 2007 level. Around half of households with variable rate owner occupier mortgage debt have enough prepayments to service their current loan repayments for almost two years,” Datt concluded.