Australia’s property market keeps heading to new heights, defying market predictions of a bubble about to burst and claims that mortgage rates will rise and spark a massive debt crisis.

Just yesterday, the Reserve Bank continued to defy claims rates would rise, saying it had no intention of increasing them until 2023 at least.

The move was not well received, with banks are already putting up rates claiming the RBA has raised the price money costs them to borrow from the central regulator.

The NAB lifted fixed rates by up to 0.2 percentage points last Wednesday, Westpac followed and the Commonwealth Bank hiked its fixed rates at the end of last week.

So what does this mean?

AMP’s Economist and Head of Investment Strategy, Mr. Shane Oliver expects that housing financed will slow 5-10 percent from the record levels recently seen.

He says, “Rising fixed rates, interest rate serviceability buffers and worsening affordability leads to slower property demand.”

Commonwealth Bank released a report on 1 November 2021 showing that the value of new lending (which excludes refinancing) fell by 1.4 percent in September 2021.

The bank’s data shows that although dwelling prices increased by 1.4 percent month on month, there are clear signs that monthly gains are slowing.

Ray White Chief Economist, Ms. Nerida Conisbee says that property price increases are not sustainable and she expects growth will slow further.

“Prices have risen across Australia at an eye-watering 23.6 percent since the start of the pandemic. The city that has seen the biggest increase has been Sydney – the median has increased by 46.2 percent to reach $1.36 million.

“Over the next 12 months, it is highly unlikely that this rapid rate of growth will continue. The increases have been driven by three main factors.

The first is very low-interest rates, the second is easier access to finance and the third is high household savings rates as a result of lockdowns/not being able to travel”.

She says that although interest rates may not increase, lending criteria are changing with home buyers expected to have a buffer and show that they can pay off a home loan that is three percent higher than the current interest rate.

That may already be reflected in Commonwealth Bank’s data which shows that lending to first home buyers has fallen. Lending to first home buyers fell by 1.9 percent, which is down by 22.9 percent at the peak in January 2021.

First home buyers are most affected by housing affordability with prices increasing 20 percent annually.

According to Commonwealth data, eight percent of home loan customers borrow at capacity so Commonwealth Bank doesn’t believe any interest rate increase will have a huge impact on borrowers’ ability to service a home loan. This could be because lenders assess a loan application based on a three percent interest rate increase.

Commonwealth Bank does expect dwelling prices to increase seven percent nationally in 2022 and Ray White shares the sentiment as highlighted by their earlier statement related to the interest rate buffer that lenders like borrowers to have.

Ray White’s Ms. Conisbee warns, “If housing finance growth doesn’t slow then we will see additional restrictions put in place and this will slow price growth.

“The third factor is the high household savings rate. Already this has started to reduce as lockdowns end and we can travel again. This means less money going into housing”.

ANZ’s Senior Economist, Ms. Felicity Emmett says, “The rise in fixed rates will act like a tightening of monetary policy. The lowest mortgage rate available to new borrowers has already lifted from the historic lows seen earlier this year and is likely to rise substantially in coming months, which will lower borrowing capacity and slow house price gains”.

She adds that “A rise in fixed mortgage rates matters more this cycle. Fixed mortgage rates have been tracking sharply below variable rates through the pandemic, prompting a significant shift in their take-up.

“Nearly half of new borrowers now choose fixed mortgages, compared with around 15% prior to the pandemic”.

AMP’s Mr. Oliver adds that buyers should expect the pace of property increases to slow due to “poor affordability, rising fixed rates, higher interest rate serviceability buffers, reduced home buyer incentives and rising listings impact.

Looking further ahead to 2023, he predicts a five to ten percent decline in prices.

Whatever happens with property prices, buyers need to be prepared and plan for interest rate increases.

Mr. Oliver says, “The key for property buyers is to realise that this is a hot market and there is a case to wait till things cool down but in the meantime, better value might be found in inner-city areas and units which have lagged lately.

“Also allow that interest rates are likely to rise from here so make sure not to take on more debt than can comfortably be serviced”.

Ray White’s Ms. Conisbee agrees and highlights the importance of sticking to a budget.

“Always sticking to a budget is the most important. While it is unlikely that prices will come down next year, more properties are now becoming available now lockdowns have ended.

This means more choice. Importantly, don’t try to pick the cycle but instead look to hold long term.

Director of Montara Wealth and Binnari Property, Mr. David Hancock advises home buyers to have a contingency in their numbers and doesn’t think it’s prudent to borrow at capacity.

“You should always have 12 months of savings in an account and a plan for interest rates increasing. Borrowers should factor in that interest rates are likely to go up.

“NAB, Westpac, and St George have already started increasing their rates but we are still seeing low-interest rates.

“When it comes to first home buyers, it’s obviously no different but when it comes to first home buyers they are often going to their limit so they should either look outside of an area or compromise on the property….or look at rentvesting. Buying in Brisbane or the Sunshine Coast and then renting in Sydney.”

He says that sometimes when people rentvest their costs are covered and the property pays for itself and then they’re just renting somewhere else.

“It can be really good for cash flow and there are other benefits to owning your own home – not being kicked out, if you’ve got kids then being locked into a certain area,” he adds.

“If you are buying outside of an area you know there’s a risk that needs to be considered so to avoid any issues you should use a buyers market,” he concludes.

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