While the number of new home approvals is showing no sign of bouncing back any time soon, owner occupiers and property investors can take some solace from growing speculation the Reserve Bank’s (RBA) rate rising is over.
The central bank is not expected to raise rates when it meets today.
What should also widen the smile on the face of homeowners is the growing number of occupier variable rate loans now available with an interest rate below 6%.
While 53 or 8% of owner-occupier variable rate loans have a sub-6% interest rate, Canstar’s research shows that a little under half (42%) of variable rate loans on offer to new customers) – and those who have already switched lenders – have an interest rate between 6% and 6.50%.
Laggards will pay more
If Canstar’s finance expert Steve Mickenbecker is reading tea leaves correctly, mortgage holders don’t have to tough it out [with higher mortgages] until the first rate cut eventuates, which economists foresee happening in the fourth quarter of 2024.
“Lower inflation in October is great news for borrowers with the Reserve Bank now highly unlikely to increase the cash rate in December, which should give a couple of months of no home loan interest rate increases,” said Mickenbecker.
“… the challenge people should be taking on over that two-month period is to give themselves an earlier rate cut for Christmas so that they start the new year with a lower repayment.”
Meanwhile, Canstar’s analysis of new owner-occupier variable interest rates shows rates offered by lenders ranging between 5.5% to 9.5%.
Mickenbecker reminds borrowers, potentially paying 3.5% more, are effectively subsidising savvy borrowers who have found their way into the leading deals.
He suggests any borrower paying more than 6.0% to 6.49% should look at refinancing or renegotiating into a cheaper loan.
Do the sums
Here’s a simple example to highlight the benefits of refinancing a home loan.
Existing borrowers who refinance a $500,000 loan that they were repaying over 30 years from a rate of 6.18% to the lowest ongoing variable interest rate listed on Canstar.com.au at 5.69% could reduce their repayments from $3,056 down to $2,899.
This is a saving of $157 per month or as much as $1,884 – the cost of an annual electricity bill for many households.
“If this same borrower continued to pay $3,056 per month to their new lower-rate loan instead of the reduced repayment of $2,899, they could potentially save $134,171 in interest and repay their loan over 3 and half years sooner,” Mickenbecker said.
Lending for home building continues to wane
While higher home loans may be starting to unravel, 13 successive cash rate increases over the last 15 months have seen the volume of work entering the pipeline seriously contract.
According to ABS’s Lending to Households and Businesses data, which was released for October 2023 today, lending for the construction and purchase of new homes in October rose 1.8% compared to the previous month.
Overall, this leaves lending for the construction and purchase of a new home 22.4% lower than at the same time last year.
Despite the dire need to increase the supply of new homes, Tim Reardon, Housing Industry Australia (HIA) chief economist expects new home construction to continue slowing through 2024.
Given that this poor result was recorded before the rise in the cash rate in November, Reardon can see no justification for further rate increases.
“Leading indicators of activity all show that the rise in the cash rate will cause activity to slow in 2024,” said Reardon.
“The RBA needs to pause on any further rate increases and wait for the full impact of their actions to date to flow through to the wider economy.”
What happened in the last quarter?
The total number of loans for the purchase of construction of new homes in the three months to October 2023 declined in all jurisdictions compared to the same quarterly period last year. Here’s a state-by-state breakdown:
- Northern Territory down 58.2%.
- Australian Capital Territory is down 53.6%.
- New South Wales down 29.3%.
- Tasmania down 29.2%.
- Victoria down 25.9%.
- Queensland down 20.1%.
- South Australia down 18.9%.
- Western Australia down 1.5%.
In 2024 home builders will be starting construction on fewer new houses than at any time in the last decade.
New house starts also plunge to decade low
While lending for the construction and purchase of a new home is down over a fifth on the same time last year, building approvals are also lower.
According to ABS data for October, month-on-month building approvals showed a 1.2% increase in October yet were 14% lower than 12 months ago.
Pleasingly, multiunit approvals received a 19% kicker in October, yet this remains 19% lower than the long-run monthly average and 14% lower than 12 months ago.
While Australian home builders had a significant pipeline of work under or awaiting construction when the RBA started increasing interest rates in May 2022, Tom Devitt, senior economist at the HIA notes the pipeline is now shrinking.
“In 2024 home builders will be starting construction on fewer new houses than at any time in the last decade,” Devitt said.
Given the unfurling of global supply chains for home building materials and fuel will have eliminated most of Australia’s excess inflation by the end of this year, Devitt accuses the RBA of being “impatient” in wanting to see progress in its lagging indicators.
“The RBA’s interest rate increases will suppress home building and spending across the broader economy next year by much more than would have been necessary to get inflation over the line into the RBA’s 2–3 per cent target range,” said Devitt.