Each rate rise locking aspiring homebuyers out for a decade, study finds

In short:

A rate rise is estimated to cause an immediate 5 per cent reduction in home purchases.

Economic modelling suggests the home ownership rate would fall by 0.3 of a percentage point and take more than a decade to recover.

What's next?

The RBA will announce its next interest rate decision on Tuesday, September 29, with markets and economists almost certain of a rate rise.

Each standard interest rate increase could be locking close to 30,000 households out of home ownership, some of them for more than a decade, research suggests.

The modelling was conducted by James Graham, a senior lecturer in economics at the University of Sydney, along with Avish Sharma, a PhD candidate at Northwestern University who is a former analyst at the Reserve Bank of Australia.

Dr Graham said that early findings from the study showed a typical 0.25 percentage point increase in interest rates causes an immediate 5 per cent decline in home purchases — a phenomenon in evidence in Australia's housing market downturn.

The research finds buying remains lower for up to two years following the rate increase.

That fall in housing purchases translates to a decline in the home ownership rate of 0.1 percentage point within weeks of the rate rise, peaking at 0.3 per cent four years later.

"To put that in context, the home ownership rate at the moment sits at about 66 per cent," Dr Graham told The Business in an exclusive interview about his yet-to-be-published research.

"So you're talking about maybe one-third of a per cent knocked off that 66 per cent."

Loading...That may not sound like a lot, but with close to 10 million households in Australia, each rate rise could be locking up to 30,000 households out of home ownership for years.

But Dr Graham said each subsequent rate rise produced a smaller shock than those before it.

"Those first rate rises, they were probably the most damaging, they were the ones that pushed a bunch of people out who missed out for a very long time," he said.

"The subsequent rate rises, though, you're sort of pushing into a part of the population that's likely more and more able to cope."

Even so, with three rate rises already this year and the high likelihood of more to come as soon as next Tuesday, the research suggests that the RBA's monetary policy actions could reduce home ownership by more than Treasury forecasts the federal government's investment tax changes to boost it.

Loading...Locked out for 'many, many years'

The modelling suggests home ownership rates eventually recover from the interest rate shock, but take more than a decade to fully do so.

Dr Graham said that was because changing life circumstances meant many prospective buyers locked out by rate rises remained excluded from ownership for years, some permanently.

"If you miss out on that ideal time, maybe next month or next year, you've changed jobs by then, new kids have come along, or the bank has changed its mind about how much it will lend," he said.

"It often means that you've missed out now, but you've actually missed out for many, many years to come."

Potential homebuyers do get a benefit from the housing value declines typically associated with interest rate increases, however.

"If you're sitting there with a bunch of cash or your mortgage ready to go, that's a great time to buy," Dr Graham said.

"But what we find is that a lot of people are not sitting there with all their money ready to go, necessarily."

For this group, the research finds the benefit of lower prices is more than outweighed by the increased cost of borrowing, tighter serviceability tests on loan applications, and reduced income growth due to the general economic slowdown from higher rates.

"If you're struggling to get that mortgage or your income's falling, so you're going to struggle to repay that mortgage, the fact that the house is cheaper doesn't help," Dr Graham said.

The research also suggests that younger first home buyers and those on lower incomes are disproportionately affected by rate rises.

Dr Graham said there were several things changes policymakers could consider to minimise the impact of rate rises on the home ownership rate.

"Do we need such a large serviceability buffer given that we're already very high into the interest rate hiking cycle?" he asks, questioning banking regulator APRA's 3 percentage point buffer above current mortgage rates, which has remained unchanged as rates climbed off their post-COVID lows.

"States can look at do they need such large stamp duties, could they sort of like change those into land taxes or something like that instead?"