March 2022 – Please be aware of scammers falsely representing AMP Capital. AMP Capital is aware of an ongoing scam operation targeting customers and the broader community, offering inflated interest returns, available through fictitious investment vehicles, titled AMP Capital High Yield Fixed Return Global Market Fund. Through the use of phishing emails and phone calls, malicious operators are attempting to entice them to invest in a false product that features AMP Capital’s branding. Please be aware this is a not a legitimate product from AMP Capital.

AMP Capital does not approach potential customers via electronic direct mail (EDM) nor does the company solicit personal or financial information via email. If you are concerned that you may have been targeted by scammers, please contact us on 1800 658 404 from 8.30am to 5.30pm Monday to Friday (Sydney time). More information on scams can also be found on the ACCC’s website Scamwatch.

Economics & Markets

Econosights: Australian housing – impacts from the fixed rate mortgage “cliff” and risks to housing construction

By Diana Mousina
Economist - Investment Strategy & Dynamic Markets Sydney, Australia

Key points


A large chunk of home loans that have been recently fixed at ultra-low rates will roll onto a variable mortgage rate that is 2-3 times higher. This is a downside risk for consumer spending, despite the positive offsets of high accumulated savings and housing pre-payments.


Residential construction activity was strong over 2020/21 (despite fears of a fall as net migration went to zero and the associated decline in housing demand) because of low interest rates, cashed up households, a fall in the size of households and the HomeBuilder subsidy. Housing construction will decline in 2022 as interest rates rise and as demand normalises post HomeBuilder.


But, a falling national residential vacancy rate and the return of immigrants and students suggests that residential construction will not collapse as rates increase.


In this Econosights we look at some of the current issues in the housing market, including the the expiration of fixed rate mortgages and the outook for residential construction.

Expiration of fixed rate mortgages

Housing lending surged in 2021 for owner-occupiers as demand for new homes got a boost from low interest rates, government fiscal transfers to households and the HomeBuilder subsidy, with lending up by 26% over the year to Dec-2021. Investor lending also surged in 2021/22 (after bottoming in 2020) as uncertainty around the pandemic eased and rapidly rising prices encouraged investors back in to the market.

  Source: ABS, AMP
Source: ABS, AMP

Fixed mortgage rates declined in 2021 (the 3-year fixed rate bottomed at 2.1% in mid-2021) because of increased competition between lenders, lower costs of borrowing thanks to the RBA’s Term Funding Facility and the RBA’s 0.1% three-year bond yield target. This led to a big lift in mortgage holders fixing their loans. Usually, fixed lending is 10-15% of total outstanding lending in Australia but in 2020/21, this lifted to over 40% (see chart below).

Source: ABS, AMP
Source: ABS, AMP

In Australia, the term for fixed home loans is usually for a period of 1-5 years (quite different to the US where you can fix for 30 years and refinance inbetween if interest rates fall which is a good deal for mortgage holders). CBA analysis of their lending book suggests that the largest share of these loans expire in the second half of 2023 which means that households will roll onto a variable mortgage rate that could be 2-3 times their current fixed rate. The households impacted make up around ~30% of the total housing loan stock according to bank data which is a significant downside risk for consumer spending. We see consumer spending growth declining to just over 1% per annum in late 2023, well down from 4% over the year to March 2022. Some potential offsets to these higher costs of debt include the accumulated savings of households (worth around $250bn) which can be utilised, high mortgage prepayments (RBA research suggests ¾ of variable mortgages are more than 3 months ahead on repayments) which reduces the risk of missed payments/bad loans in the short-term and rising wages growth.

The residential construction outlook

The fall in net migration in 2020/21 from Australia’s closed borders (net migration only turned positive again in the December quarter of last year for the first time since March 2020) was negative for fundamental housing demand. However, this was offset by a fall in mortgage rates, cashed up households, a fall in the size of households due to the pandemic and the HomeBuilder subsidy which lifted demand for new housing. Residential construction added up to 0.7 percentage points to annual GDP growth in mid-2021, its highest annual contribution since 2004.

Net migration is starting to rise again which is positive for residential construction. But, rising interest rates, higher construction costs and the end of the HomeBuilder subsidy (which brought demand forward) are headwinds for new housing demand. Building approvals have plunged for houses, down by 29% over the year to May while apartment approvals are holding up better (down by 4.2% over the year to May).

Despite the recent weakness in building approvals, residential vacancy rates fell to around 1% in June, which is around their lowest point since the SQM data started in 2009 (see the chart below), after reaching a cycle high of 2.5% during the pandemic. The fall in the vacancy rate is a sign that more new housing construction may be required.

The fall in vacancy rates has been broad-based across the states and territories but are lowest outside of Sydney and Melbourne. Vacancy rates lifted in Sydney and Melbourne the most during the pandemic (reaching 4% in Sydney and 4.5% in Melbourne) as these two cities tend to be the destinations for new immigrants and students. Large interstate outflows from NSW and Vic (see chart below) into Qld and WA also put upward pressure on vacancy rates in Sydney and Melbourne. Solid labour markets and the return of migration should see falls in Sydney and Melbourne vacancy rates.

Source: ABS, AMP
Source: ABS, AMP

The low vacancy rate is lifting rents. Asking rents (rents for properties newly advertised) are running at 12% year on year for houses and units and are much higher than the rents in the quarterly consumer price index data (which include all rents) which are still tracking at only 1% year on year to March (but further rises are likely from here).

Despite the lift in interest rates, rising rents could encourage investors into the market, especially as home prices decline (we expect a 15-20% peak-to-trough fall in national dwelling prices into 2023) which will lift rental yields.

Building approvals and completions of detached houses has some further downside from here as demand normalises post HomeBuilder but apartment approvals should do better as net migration returns. Rising interest rates will have a negative impact on housing demand but falling residential vacancy rates suggests that housing construction needs to rise further. We expect building approvals to be around 180K in 2022 and 160K in 2023, down from 228K in 2021.

This means residential construction will be a small drag on Australian GDP growth over the next 12-18 months (see the chart below) but we are not expecting a collapse in construction as interest rates rise.

Source: ABS, AMP
Source: ABS, AMP
  • Economics & Markets
  • Econosights
Share this article
Subscribe to Econosights

Subscribe today to receive regular economic & investment updates

You may also be interested in...

You may also be interested in...

You may also be interested in...

You may also be interested in...

Our Privacy Policy explains how we handle personal information and use cookies and website tracking. We will follow the cookie and tracking settings you have selected in your browser.

Important notes

While every care has been taken in the preparation of this information, neither National Mutual Funds Management Ltd (ABN 32 006 787 720, AFSL 234652) (NMFM) nor any other member of the AMP Group makes any representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This email has been prepared for the purpose of providing general information, without taking account of any of your objectives, financial situation or needs. You should, before making any investment decisions, consider the appropriateness of the information in this email, and seek professional advice, having regard to your objectives, financial situation and needs.

Cookies & Tracking on our website.  We use basic cookies to help remember selections you make on the website and to make the site work. We also use non-essential cookies, website tracking as well as analytics - so we can amongst other things, show which of our products and services may be relevant for you, and tailor marketing (if you have agreed to this). More details about our use of cookies and website analytics can be found here
You can turn off cookie collection and/or website tracking by updating your cookies & tracking preferences in your browser settings.