Australians are battling crippling mortgage stress and historically low housing affordability as they wait for the Reserve Bank to cut interest rates.

Amid speculation by markets and economists, one major player believes the first cut could come in November, but it’s really anyone’s guess when the central bank will pull the trigger.

PropTrack’s Housing Affordability Report has revealed, for the second straight year, that property has never been less affordable in Australia.

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Last year’s report put us at rock bottom. But then we started digging. The 2024 report states the further deterioration of affordability has been “caused by continued high mortgage rates, combined with home prices (increasing) a further 6.6 per cent over the year”.

The result? A median income household earning $112,000 a year could afford just 14 per cent of houses or units sold in Australia over the past year.

Three years ago, that number was 43 per cent. In 2021, the biggest challenge was saving a deposit in a low interest rate just to get into the market. Add 13 rate rises to the equation and now servicing a loan is the major hurdle for most.

PropTrack’s annual Housing Affordability report revealed that housing has never been less affordable in Australia for the second straight year. Picture: NCA NewsWire /Brenton Edwards

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PropTrack’s report revealed the average household with a mortgage is now spending more than 30 per cent of its income on loan repayments, placing it under ‘mortgage stress’ according to popular definition.

The effects have been extreme, with the recent Finder Consumer Sentiment Tracker revealing 42 per cent of mortgage holders struggled to make loan repayments in August and were skipping groceries and petrol to do so.

“Higher repayments are straining household budgets and we’re seeing that impact economy-wide spending,” PropTrack economist and report co-author Paul Ryan said. “It’s also making it harder for first home buyers … in the past 12 months we’ve seen 30 per cent fewer new buyers enter the market.”

Impact of a cut

So where is the relief? Earlier this week the ASX RBA Rate Tracker predicted four rate cuts in the next 12 months. One day later the US Federal Reserve slashed interest rates by 50 basis points.

The fight against inflation is transitioning to a recession rescue mission. One rate cut will help, but more will be needed to make a difference, Mr Ryan said.

“Mortgage rates would need to fall to 5.32 per cent from a current level of 6.24 per cent, so just less than four cash rate reductions to put the average income household below the (mortgage stress) threshold,” he said.

Most of the major lenders have predicted the next rate movement will be down and that the easing cycle will feature up to five rate cuts, but don’t expect any until 2025. The outlier is the Commonwealth Bank, whose CEO Matt Comyn has stood firm in predicting a rate cut on Melbourne Cup day this year.

CBA’s guidance from its head of Australian economics Gareth Aird is that consumer inflation will decline more swiftly than the RBA expects. This, combined with a loosening in the labour market, would be the catalyst for the RBA to begin cutting rates in 2024.

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PropTrack economist Paul Ryan said that one rate cut will help buyers, but more will be needed to make a difference. Picture: Supplied

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Canstar’s data insights director Sally Tindall calculated how much a typical household would save on loan repayments if rates were slashed four times and passed on in full by lenders.

“On a $600,000 owner-occupier mortgage with 25-years remaining, it would (reduce) repayments by $359 a month and save $2478 in interest over the next year,” Ms Tindall said.

Beware banks offering fixed ‘deals’

Banks have already begun cutting rates on their fixed home loan products, with Canstar’s database showing 30 lenders reducing fixed rates in the last two months.

But banks offering “deals” should be regarded with suspicion. They are there to make money for the bank, not its customers.

Locking in a fixed rate deal now could mean missing out on thousands in savings by this time next year.

Canstar’s data insights Director Sally Tindall calculated that four rate cuts would give a $600k owner-occupier mortgage payer an extra $359 per month. Picture: Tim Hunter.

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“Even if rate cuts don’t materialise until the first few months of next year, a handful of rate cuts could change this equation entirely, particularly for fixed rate terms of two years or more,” Ms Tindall said. “The idea of locking in a fixed rate, only to see the RBA make multiple cuts to the cash rate, would be too much to bear for many borrowers, particularly when fixed rates come with break fees for those looking to get out.”

Property market boost

SQM Research head Louis Christopher believes a single rate cut will be enough to shift momentum in a flat property market.

“We are currently in a downturn, albeit a very moderate and modest one, because there is still a shortage of properties nationwide,” Mr Christopher said. “When we do get a rate cut, we’ll be back off to the races. Confidence will return and there will be more players back in the market.”

Mr Christopher believes those who are able to buy property now could set themselves up for strong value gain in the short term.

“We’re in a window where the market is soft,” he said. “Those getting into the market now may benefit from growth next year when rates are cut.”

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