Over the past two years, house prices have dropped 10 per cent, a time when mortgage rates have fallen markedly and household incomes have risen by over 6 per cent, even though wages growth has been weak.
A 3 per cent mortgage interest rate will mean that monthly repayments on a $400,000 mortgage, repaid over 30 years will be under $1,700. This is down from almost $2,300 a month when interest rates were 5.5 per cent. Looked at another way, for that $2,300 monthly repayment on a $400,000 loan when rates were 5.5 per cent, the same monthly repayment is required for a mortgage just under $550,000 when interest rates are 3 per cent. That is an extra $150,000 of borrowing capacity.
Either through a higher borrowing capacity or a lower monthly repayment, housing affordability is extremely favourable.
It’s time to negotiate on your mortgage rate
It is a good time to negotiate a lower interest rate given strong competitive pressures because no one should be paying more than 4 per cent even before the next few interest rate cuts are delivered. It should be reasonably clear what this means for house prices. Already house prices are starting to edge up as the impact of lower interest rates and favourable affordability attracts new buyers.
Easier credit conditions are also feeding into stronger housing demand. If interest rates do fall as the market is pricing and there is further strong ongoing demand from first home buyers and strong population growth, house prices are set to register solid gains for the next year or two. It would be reasonable to expect nation-wide house prices to rise 5 to 10 per cent between now and the end of 2020, with the strongest gains likely in Perth, Sydney and Melbourne.
Rising house prices will help to support household wealth levels, an issue that has a strong influence on consumer spending.
All of which points to a better year for the economy into 2020 driven, in large part, by the RBA coming to its senses and delivering aggressive interest rate cuts in a simple yet effective measure to boost economic growth.