It’s 2023 and after a long hiatus from this blog, I am back baby! And what an interesting time in the financial market it is. The rising cost of living, the interest rate hikes, and the global instability has got me and probably most average Aussies feeling a little nervous. It will be interesting to see what happens this year as the full force of the interest rate rises is finally felt in many households who have until now been shielded through low fixed rate mortgages.
Rising interest rates in Australia are likely to have a significant impact on the housing market. As interest rates increase, the cost of borrowing money to purchase a home also increases, making it more difficult for potential buyers to afford a mortgage. This, in turn, can lead to a decrease in demand for homes, which can cause house prices to drop.
One of the main reasons for the current rise in interest rates in Australia is the increasing cost of borrowing money on the global market. As the global economy recovers from the COVID-19 pandemic, demand for money is increasing, which is driving up the cost of borrowing. This increase in the cost of borrowing is being passed on to consumers in the form of higher interest rates on mortgages and other loans.
Another factor that is likely to affect house prices in Australia is the current state of the housing market. The housing market in Australia has been experiencing a period of strong growth in recent years, with prices rising at a faster rate than wages. This has led to concerns about affordability, as many potential buyers are finding it difficult to afford the cost of a home. If interest rates continue to rise, this affordability gap is likely to widen, further reducing demand for homes and pushing prices down.
However, it’s important to note that while rising interest rates can have a negative impact on the housing market, they can also have a positive impact by slowing down inflation in the housing market, which can help to stabilize prices over the long term. Additionally, it can help to moderate overall economic growth and curb inflation.
The “mortgage cliff” that Australia is facing refers to a large number of fixed-term mortgages that are set to switch to variable interest rates in 2023. This could potentially lead to a significant increase in mortgage payments for many homeowners, and potentially cause financial strain for some.
The reason for this “cliff” is that a large number of mortgages were taken out during a period of low interest rates, with many borrowers opting for fixed-term loans to take advantage of these low rates. However, as the global economy recovers from the COVID-19 pandemic, interest rates are starting to rise, and many of these fixed-term loans are set to switch to variable rates in 2023.
For homeowners with mortgages that are set to switch to variable rates, this could mean a significant increase in their mortgage payments. Depending on the size of the mortgage and the interest rate increase, this could be a significant financial burden for some homeowners. Additionally, many homeowners may not be prepared for this increase in payments and may struggle to make their mortgage payments on time.
However, it’s important to note that while the mortgage cliff is a concern, it’s not necessarily a crisis. Many homeowners may be able to refinance their mortgages to avoid the increase in payments, or they may be able to negotiate new terms with their lender. Additionally, the Reserve Bank of Australia has stated that they will continue to monitor the situation and may take steps to ensure that the transition to variable rates is as smooth as possible.
In conclusion, rising interest rates in Australia are likely to have a significant impact on the housing market, with higher costs of borrowing making it more difficult for buyers to afford a home. This could lead to a decrease in demand for homes and a drop in house prices. It could also lead to some forced sales which if it happens to enough people can also bring the prices down due to too much supply and not enough demand. However, it’s also important to consider the broader economic context and the potential long-term benefits of rising interest rates in moderating inflation and stabilizing the housing market. For so long, we have had unsustainable house price costs and increases, we should have known it wouldn’t last forever.
