Breaking News – RBA lifts
cash rate another 0.25% But what does it mean to a private lender, and how should
we analyse risk?
It seems totally
appropriate to me that in our statistically voracious world, the adage “There are three kinds of lies: Lies,
Damned Lies, and Statistics” — has been attributed to Mark Twain, who himself
attributed it to British Prime Minister Benjamin Disraeli, who might never have
said it in the first place.
Lies, damn lies, and
statistics. Do
statistics relating to the decline in home values around Australia “speak with
a forked tongue”?
Yes
and no.
In
simple terms, I have been unable to find statistics that drill down the way I’d
like for my practical needs. Loan to valuation ratio (LVR) is the single most
important determinant in private mortgage lending. And in a softening valuation
market, it’s not only the direction, but also the pace of that softening which
is important.
Numbers
that I’ve been able to find regarding recent house price reductions are
interesting in general trend terms, but they seem to only relate to the real
estate adage – location, location, location – broken up as to Australia, State,
City/Town, and even suburb.
What
is missing, is price point analysis within those locations; and in my view, that
is what a private lender needs to determine current LVR and risk profile.
There
is no doubt that the general trend for house prices has been down for some
time. Briefly, in that context, it is interesting to note that CoreLogic’s
national Home Value Index in January declined by 1.0%, after the decline on
December was 1.1%. This January
reduction was the smallest month-on-month decline since June last year.
The
consensus seems to be that house price reductions will continue.
Today, Reserve Bank of Australia (RBA) called its ninth
consecutive interest rate hike since May last year, upping the official cash
rate to 3.35 per cent on Tuesday (7 February) - the highest level since late
2012. It is largely expected to increase further at the next RBA board meeting
on Tuesday, 7 March 2023.
PropTrack director for economic research Cameron Kusher
commented: “At the beginning of May 2022, official interest rates were sitting
at 0.1 per cent. By the end of 2022, the cash rate had increased to 3.1 per
cent.”
“Today, the Reserve Bank lifted rates another 25 basis points.
“With borrowing costs continuing to rise and the subsequent reduction
in borrowing capacities, property price falls are likely to continue and
accelerate in 2023, with the more expensive cities likely to see the largest
price falls.
“Nationally, we are forecasting prices to fall by a further 7
per cent to 10 per cent by the end of this year.
He added: “With the RBA’s hike of 25 basis points today, we’re
expecting an additional rate rise of 25 basis points, or thereabouts, likely to
follow next month.
“Thereafter, we expect rates to remain on hold, with the
potential for them to be reduced in late 2023 or early 2024.
“We anticipate these further interest rates rises will push
prices lower. However, a lower interest rate peak and earlier than expected
interest rate cuts could ease price falls,” Mr Kusher stated.
And all of that is very interesting. But wouldn’t it be great if
we could form a view on LVR appetite based on the inter-relationship of
location by price point? If someone can point me in the right direction, I’m
all ears.
Steven Acworth
