With the average home loan size around $767,000 in New South Wales, and around $637,000 in Victoria, higher interest rates are set to hurt some households and could force those on the margin to default on their loans. New data showing the number of distressed home sales is on the rise.

Data from the Australian Bureau of Statistics reveals that nationwide, the average home loan size was $609,789 in June 2022, compared to $571,995 one year earlier, representing a rise of 6.6 per cent. The chart below shows a significant jump in loan prices from 2019 levels, with mortgage values in New South Wales alone up 42 per cent from three years earlier to reach their current levels.


According to SQM Research Managing Director Louis Christopher, property vendors are having an increasingly difficult time finding buyers for their properties and he expects more distressed selling as interest rates and mortgage repayments rise.

“There is now a clear trend across all cities of rising listings which is being driven by lower buyer interest and is ultimately symptomatic of the national housing downturn,” says Christopher.

“I believe we will see further rises in distressed sales activity. We currently are recording just over 6000 properties selling under distressed conditions. I would not be surprised to see that number rise to about 8000 listings by the end of the year given the very high likelihood of more rate hikes,” he says.

According to SQM Research data, as of 26 July 2022, there were 6,257 residential properties nationwide selling under distressed conditions. The rise in distressed selling activity was driven by Queensland (up 6.4 per cent) and NSW (up 5.8 per cent) and compares to 6,014 distressed listings on 28 June 2022 and 5538 listings on 5 April.

According to CommSec chief economist Craig James, the housing market has responded quickly to higher interest rates with falling property prices are he expects losses to continue over the coming months as rates continue to rise.  The Commonwealth Bank, the nation’s biggest home lender, expects the central bank to raise the cash rate by another 50 basis points in September and 25 basis points in November, which would take the cash rate to 2.60 per cent by the year’s end.

“Since rates started to rise, Sydney prices have slowed by the most in 40 years. Outright falls in home prices will become common across the country in the next few months,” James predicts.

According to PropTrack’s latest Property Market Outlook, home prices could fall by up to 15 per cent over the next 18 months nationwide; the research house is forecasting prices to fall by between 2 per cent and 5 per cent by the end of this year and then by a further 7 per cent to 10 per cent by the end of 2023.

“The recent run-up in prices, coupled with reducing borrowing capacities as interest rates rise, is likely to see price falls broaden and then accelerate further into 2023, with the more expensive cities expected to record the largest price falls,” says Cameron Kusher, executive manager of economic research at PropTrack.

Savings cushion may not be enough

According to the Reserve Bank of Australia (RBA), the high level of household savings could help home borrowers to meet higher mortgage payments. Households have saved around $260 billion since the onset of the pandemic. 

"The accumulated stock of these savings could help to ease the transition to higher mortgage payments for many borrowers, allowing them to sustain higher levels of consumption than otherwise," Reserve Bank of Australia Deputy Governor Michele Bullock recently said. Since the start of the pandemic, payments into offset and redraw accounts have been substantial, totalling around 3½ per cent of household disposable income (see the graph below). 

Household savings rate

However, Bullock conceded that highly indebted households are especially vulnerable to financial stress as rates rise.  “Recent borrowers are more vulnerable than earlier cohorts, as they are more likely to have borrowed at high debt-to-income ratios, have had their serviceability assessed at lower interest rates (albeit with larger interest rate buffers) and have had less time to accumulate equity and liquidity buffers," Bullock said.  

Shane Oliver, chief economist at AMP Investments, thinks the problem is broader than that; he expects to see much more distressed property selling as interest rates rise and some borrowers inevitably default on their home loans.

“More than a third of all households with a mortgage – whether variable or fixed - will see a greater than 40 per cent increase (and much more so for those on fixed rates). Roughly speaking, this is about 1.3 million households. This, at a time of falling real wages, will have a huge impact on spending in the economy and risk a significant rise in forced property sales,” says Oliver.

“Looked at another way - a new borrower with an average $600,000 mortgage will have seen around a $600 a month increase in their monthly repayment since April once the latest rate hike is passed through. That is roughly an extra $7000 a year. Taking the cash rate to 3.1 per cent would imply an extra $12,300 a year since April in mortgage payments. This is a huge hit to the household budget and spending power.”

Oliver also makes the point also that the surge in house prices and hence household debt levels over the last 30 years was made possible by falling interest rates. A rise in the cash rate to 3 per cent or more would push total mortgage repayments to record high levels relative to household income, exposing households to mortgage defaults if economic growth slows.