If you are still searching for a loan and that dream home, we’ve got bad news – both are about to undergo major changes that will put that dream further over the horizon.
You could be forgiven for having missed the warnings.
Experts can’t agree about what’s really happening: some banks say property prices will rise 21 per cent next year; others warn it will be far less, with a fall in 2023.
And the Reserve Bank of Australia keeps telling us they won’t be lifting loan rates until 2024. But nobody believes that. Money markets have factored in as many as five rate rises next year. Yes, FIVE!
Yesterday, the Reserve Bank dumped “yield curve control” — designed to keep the cost of money low by buying billions of Australian government bonds.
This move immediately sparked speculation that rates would soon be on the way up.
RBA head Dr Philip Lowe maintained the RBA would “not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range”.
But he cut the line the RBA has been running for months: that “the central scenario for the economy is that this condition will not be met before 2024” – flagging an earlier than anticipated lift in its cash rate target.
Inflation has gone over 2 per cent for the first time in six years. The September quarter inflation figures showed headline inflation rose 3 per cent annually.
Which means the property market is poised for a major correction. Here’s what respected economist Shane Oliver of AMP Capital had to say: “Our assessment is that the conditions for the first rate hike – inflation sustainably in target, full employment and 3% or more wages growth – will be in place in about a year and see the first hike coming in November next year taking the cash rate to 0.25% followed by another hike to 0.5% in December next year.
So paying top dollar now is not a good idea – unless you want to use a property for its real, intended purpose: as a place to live in for the next five years or so.
Inflation is rising. The Reserve Bank of Australia is about to move on those ultra-low interest rates, meaning you will get less for a deposit and pay more to borrow, if you can get a loan in the first place. You’ll get more on this on Friday, when the RBA gives us its economic outlook.
If you already have a loan, you’ll need to prepare a budget – and then work through what happens if repayments rise. The Financial Review this week said the average investor loan of $563,085 would be $653 a month higher with the cash rate at 2 per cent based on the RBA’s average investor loan rate, which is currently 3.12 per cent.
Australia’s mortgage-holders are among the world’s most heavily geared.
On top of all that, new rules came into force this week making buyers prove they can repay a loan if rates were to rise three per cent. They call it a stress test – as if we weren’t already stressed enough!
According to APRA, the restrictions will reduce borrowers’ maximum borrowing capacity by around 5 per cent., or almost $47,000.
Here’s how RateCity suggest a family of four may be affected:
…and a single person
Many investors have taken loans on the assumption – and the Reserve Bank has done nothing to counter it – that loans won’t move until 2024. But that was predicated on inflation staying low.
Prices are increasing at the bowser and at the checkout. Reports of wage rises of between 10 per cent and 40 per cent are becoming more prevalent,.
So investors are pricing a 75 per cent chance of a hike in February 2022, though most experts believe mid to late 2023 is a possibility.
So what should you do?
According to respected website CoreLogic this week, house price rises are slowing…because people simply can’t afford to pay the price.
That means you should HOLD and wait and see.
Here’s what CoreLogic had to say:
Australian housing values rose 1.5% in October, a similar result to August and September. However, taking the monthly change out another decimal point shows the market is continuing to slowly lose momentum since moving through a peak monthly rate of growth in March (2.8%). Nationally, the monthly growth rate eased to 1.49% in October from 1.51% in the previous month.
Although nationally the headline growth reading remains virtually unchanged over the month, across the broad regions of Australia market conditions are starting to show some diversity. Perth recorded its first negative monthly result since June last year, with values nudging -0.1% lower. At the other end of the spectrum, Brisbane has taken over as the fastest growing market with housing values up 2.5% in October. This was followed by Adelaide and Hobart, with both dwelling markets increasing 2.0% in value over the month. In Sydney and Melbourne, the monthly rate of growth has more than halved since the highs seen in March 2021, when they reached a monthly growth rate of 3.7% and 2.4% respectively.
Across the regional markets, New South Wales (2.1%) and Queensland (1.9%) led the pace of capital gains while Western Australia was the only broad rest-of-state region to record a marginal fall in housing values (-0.1%).
According to CoreLogic’s research director, Tim Lawless, slowing growth conditions are a factor of worsening housing affordability, rising supply levels, and less stimulus. “Housing prices continue to outpace wages by a ratio of about 12:1. This is one of the reasons why first home buyers are becoming a progressively smaller component of housing demand. New listings have surged by 47% since the recent low in September and housing focused stimulus such as HomeBuilder and stamp duty concessions have now expired. Combining these factors with the subtle tightening of credit assessments set for November 1, and it’s highly likely the housing market will continue to gradually lose momentum.”
Although the monthly pace of growth is easing, the annual trend has continued to rise, which is a factor of the stronger growth conditions throughout early 2021. Nationally home values are up 21.6% over the year to October, with half the capitals recording an annual growth rate in excess of 20%. Across the broad regions of Australia, regional Tasmania has led the nation for the pace of annual capital gains with dwelling values rising by 29.1%.
Respected economist Saul Eslake says couples are now spending 44 per cent of their income to service loans. But those considered in lower income groups can only accord 1.9 per cent of homes on sale.
Now wonder Mr Eslake says he is surprised that young people are not angrier.