Will property values crash when rates rise this year?
Is the property market going to crash? When will my interest rate rise? Should I fix the repayments on my home loan? After listening and speaking to Corelogic’s Tim Lawless at the most recent industry conference, and with having our ears close to all things property and finance related, we’re able to answer these common questions for you. Today we also celebrate and thank you, for being in business for 5 years, now with more people, more experience, and more hands-on-deck to help you with your next home loan approval.
Affordability and property prices to worsen?
Nearly every state in Australia enjoyed double-digit residential property growth over the past few years. Very low interest rates and good credit availability is why most Australian property owners have seen themselves make on average hundreds of thousands of dollars - if they’ve been lucky enough to get into the market that is.
There’s a lot of equity now in the property market but in contrast, a few industry experts believe there is now a larger disparity in wealth classes as a result - a challenging issue our policymakers face, on top of everything else that's happening here and abroad. With the election scheduled for May this year and the budget at the end of this month, it will be interesting to see how the people in government look to tackle this affordability & homeownership challenge that we have.
It's true, it is hard if you’re not in the market already, especially when wages or incomes aren’t rising by as much as what property prices have. Australian housing values are up 20.6 percent over the year to January whereas wages are up only 2.3 percent. See the difference in the graph below from Corelogic:
Another interesting statistic to look at is, for a Sydneysider, 10 times your income on average, is what a dwelling value or property will now cost you. This affordability index is representing slightly dated data from Corelogic in this graph, but it supports the narrative here that prices are super high at the moment.
With house prices at sky-high levels and the present affordability issues, economists were predicting last year that a downward phase had to come and would be much welcomed to normalise the Australian property landscape and according to the data, it has started.
See here, the month-on-month change in the national dwelling value index. The downward trend has been a little slower though in more affordable cities such as Brisbane and Adelaide, along with those regional cities, in comparison to the capitals.
Industry experts are attributing this slow down to increases in fixed rates, inflationary fears and more normalised listing levels.
Will this slow down, be that bad, and will it all come crashing down fast?
Some industry experts believe that even with rising rates, that demand will continue to be strong. With savings levels as they are after the pandemic, as per the graph below which shows the household savings ratio, and expected wage increases with inflation, people could still be able to afford slightly higher repayments. An extra 1 percent, on a loan of $750,000, will only increase repayments by $388 per month. And an increase of 1.5 percent, is an extra $577 per month. It’s expected that when rates rise, they will rise slowly.
Other economists are suggesting that a lack of new housing supply should slow the decrease in values if demand stays as it is. Given the shortage in building supplies, and increases in costs to build, this notion of prices not dropping that fast, could hold true because new properties simply won’t be supplied in time to meet demand. With the fact that the borders for overseas migration into Australia have now opened, there’s a population that’s going to increase, so here’s another factor supporting the notion that the slowdown won’t be as bad as expected by the big banks who are predicting significant value decreases in 2023. See here the savings levels in Australia according to Corelogic.
Even if there is a slowdown when interest rates do eventually rise, we can’t forget how much equity is here and has been made in the Australian property market. You should still be able to leverage this equity into new investments. See here, since 1982, the long-term trend in dwelling values has been upward. This goes to show a dip or plateau in the Australian property market, is something that is likely to be short-lived.
Interest rates - when will they rise?
Reserve Bank Governor Philip Lowe said most recently, an interest rate increase in Australia is “plausible”. He’s always said, over the years, that changes in inflationary related data is what will force the decision to raise interest rates. The Consumer Price Index (CPI) is one of these data sets, and results will be announced by the Australian Bureau of Statistics (ABS) for the March quarter, on the 27th of April 2022. There will be another announcement by the ABS on the 27th of July. These dates and the data within them, will determine how hard or how fast the Reserve Bank of Australia will move variable rates. If the CPI data and the more recent high prices are here to stay, then we could see rates increase quite quickly. As former treasurer Peter Costello a few weeks back put it at the Connective conference, “inflation is increasing because we’ve had loose monetary policy (low rates) and there’s simply more money in the system” chasing the same timber, oil, groceries, and supplies in general. Adding a worldwide shortage to these goods makes things very challenging for policymakers – is the genie out of the bottle or are these high prices temporary?
So if rates are likely to rise, albeit slowly, do we fix now, or not?
See in the graph below, the fixed-rate mortgage rates are trending higher since early 2021, with the upward trend sharpening in the December quarter of last year. We at Black & White Finance are in almost all instances, proposing at least a portion of the debt to be set to a fixed-rate repayment type in our loan proposals. While there are a lot of reasons which need to be looked at when comparing what’s in a borrower's best interests, whether to go for fixed or variable repayments, it’s clear to see how high the fixed rates have already gone up.
Note, the US Federal Reserve raised interest rates by increasing their cash rate by 25 basis points or a quarter of a percent this week and are expected to continue to increase these rates until the end of the year in their attempts to tackle inflationary pressures.
If we here in Australia end up following suit and our inflation or CPI results end up as expected, and our variable rates increase, this will likely weigh on borrowing decisions. So it’s wise to consider fixing at least a portion of the loan to safeguard against future rate rises - to provide a bit more certainty.
Final thoughts
Even though rates are likely to rise, we can see the actual impacts to repayments above, and that’s if they even get that high. For comfort, we can look at historical property prices, to understand that the plateau or downturn won't last forever. Lastly, we can look to fixed interest rates, to achieve stability and certainty around what our future repayments will be.
If you want to know more about the different rates, terms, or bank specials on offer at the moment or just have a general question, please send a note to peter@blackandwhitefinance.com.au or click the start today button a little lower. With the help of these amazing people below, we will be able to support you.
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5 years ago we opened our doors, officially, as Black & White Finance.
Springboarding out of a tiny bedroom in a unit block, inspired by the upcoming birth of our first child, and a vision to create a special mortgage brokerage.
We wanted to create a business that creates a better life for people, making applying for finance a personalised, special experience. We wanted then and still want to keep making finance for people black & white – with no grey areas. It's truly overwhelming and humbling to think of all the people we’ve helped over the last 5 years and it’s quite crazy actually - time really does fly. To the people who have trusted us with this support and service along the way, thank you.
Thank you to everyone, our staff, our clients, our families, friends, strategic partners, banks, lenders, our aggregator Connective and to all the people that have made this last 5 years possible.
We’re really happy with what’s been achieved thus far and we’re super excited about what’s to come (soon). Here's a tiny snippet of what we've achieved:
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