Housing economist forecasts worst housing downturn in 70 years as Reserve Bank hikes hit borrowing capacity

Australia faces the worst housing downturn in 70 years as the likelihood of the fourth interest rate hike this year diminishes the borrowing capacity of prospective borrowers, a leading housing economist says.

An average, full-time income earner’s borrowing capacity would be $47,400 less compared with $94,700 for a dual income couple should the Reserve Bank hike rates on Tuesday afternoon for the fourth time since February, Canstar calculated.

ndependent housing economist Cameron Kusher said a 13 per cent national peak-to-trough downturn was likely, which would be worse than the 7.7 per cent downturn in 1982 and 1983 during a year-long recession and an 8.2 per cent drop between 2017 and 2019 following a crackdown on interest-only loans. “I think it’s going to be one of the largest downturns we’ve seen probably in the last 60 or 70 years or so,” he told The Nightly.

The combination of Labor’s Budget changes to negative gearing and capital gains tax concessions and another round of aggressive Reserve Bank rate hikes are conspiring to sink the property market. “We haven’t had policy changes like that for a long time,” Mr Kusher said.

“Interest rates on an historic basis aren’t that high, but when you consider how high property prices are, that’s going to put further downward pressure on prices and that’s why we’re looking at this larger downturn. “That really highlights that this downturn’s different.” Cotality’s Asia-Pacific research director Tim Lawless said the RBA’s multiple hikes since February were a bigger weight on the housing market than the Budget, that will abolish negative gearing for established homes exchanged after May 12 from July next year.

“It’s probably a fair assumption we haven’t seen a downturn of this size in a couple of generations,” he said. “We’re clearly seeing the market responding negatively to higher interest rates — the Federal Budget has probably added more fuel to the fire at a time when the market was already cyclically weak.” More affordable houses priced around $769,000 were better placed to withstand a downturn than more upmarket homes worth $1.34m, putting them on either side of the $995,600 national median.

“Lower borrowing capacity probably means more demand towards the lower end of the market, which is exactly what we’ve been seeing,” Mr Lawless said. Canstar calculated that borrowing capacity for a prospective homebuyer would be 9 per cent weaker than early February, should the Reserve Bank hike for the fourth time this year on Tuesday afternoon.

Another expected interest rate rise on Tuesday would reduce an average, full-time worker’s borrowing capacity by $47,400 since the start of the year, including another $11,200 being wiped from what a bank can lend.

“This might not sound like much in the context of buying a property but they’re already had three trims to their budget this year,” Canstar data insights manager Sally Tindall said. “A fourth hike would tally up to a pretty hefty cut of $47,400.” A fifth hike, as ANZ is forecasting for Melbourne Cup day, would wipe $58,000 off an individual’s borrowing capacity, with Sydney’s home prices falling by 7.1 per cent since peaking in February.

“The interesting twist is that while higher rates are shrinking borrowing capacity, property prices, in some cases, could fall further,” she said. As recently as early February, someone earning $108,352 could borrow $553,000 to buy a $691,000 unit with a 20 per cent deposit.

A fourth expected rate hike on Tuesday afternoon would see that borrowing capacity fall to $505,600 or by $47,400. This individual would now only be able to buy a $632,000 apartment, with their debt-to-income ratio maximum falling from 5.1 to 4.7. A professional couple earning $216,704 between them would see their borrowing capacity fall by $94,700 from $1.106m to $1.011m. They would have gone from being able to buy a $1.383m house to a something worth $1.264m.