CoreLogic’s most recent Home Value Index, released this morning, suggested that the slower growth in November of 1.3% suggests that the market is close to an apex.

November was the slowest month since January, and CoreLogic analyst Tim Lawless suggest that it was due to the main drivers of the market slowing.

“Virtually every factor that has driven housing values higher has lost some potency over recent months,” he said. “Fixed mortgage rates are rising, higher listings are taking some urgency away from buyers, affordability has become a more substantial barrier to entry and credit is less available.”

NAB were the first of the Big Four to back this assessment, with Andy Kerr, executive home ownership, releasing a statement that predicted an easing of prices into 2022.

“We are seeing the early signs of house prices easing as supply comes back on to the market,” he said.

“In October, we saw Melbourne and Sydney both ease month-on-month and from their peak growth in March. NAB’s forecast is for the market to be strong until the end of the year and a more subdued market in 2022.”

“We see house prices up around 25 per cent in 2021 and around five per cent in 2022. When we include unit prices, the numbers are around 23 per cent for dwellings in 2021 and around five per cent in 2022.”

“Suburbs closer to the city, with easing prices will become an option that we really haven’t seen to the same extent the last 12 months. We are seeing little green shoots of people returning to inner-city suburbs, looking for the balance of lifestyle and value.”

“Unit prices have been more subdued than houses and because CBDs are opening, people can see the lure of the CBD, particularly younger buyers. The lure of being close to the CBD and all the lifestyle that offers and the value in an apartment, we are seeing the balance is starting to tip back.”

“We’re also seeing families seeking space, young and older families, where the outer suburbs are starting to hold an appeal because they can get more value for larger properties. We also know that proximity to good amenities is still the dominant consideration for Australians when they are looking to buy.

Source: BrokerNews

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Independent economist and University of Tasmania vice-chancellor’s fellow Saul Eslake appeared before the House of Representatives tax and revenue committee for its ongoing inquiry into housing affordability last week.

According to Mr Eslake, as housing prices have surged, more and more Australians under the age of 40 have been squeezed out of home ownership.

By looking at census and HILDA survey data from 2016 and 2019, as well as the home-ownership rate in 1996, the former ANZ chief economist has calculated a gap of around 12 per cent in households that would have owned their home 25 years ago, compared to now.

Factoring in that the decline in home ownership would have been considerably sharper for those under the age of 45, while those older than 65 would have a rate consistently above 80 per cent, he has adapted the 12 per cent estimate into a range of 10 to 15 per cent.

“These are people with reasonable incomes that allow them to quality for and service a mortgage without undue stress but who, because property prices have risen at faster rates than their incomes over the last 30 years, have nonetheless been unable to purchase a home,” Mr Eslake told the committee.

While the ratio of house prices to incomes has roughly doubled over the last 30 years, the proportion of income absorbed by debt service has declined because of the fall in interest rates since the early 1990s.

Mr Eslake noted “servicing a mortgage is in principle not much more difficult than it was, say 30 years ago”, but interest rates will not always remain at record lows.

At the same time, the low rate environment has contributed to the largest hurdle for aspiring buyers, saving the deposit.

“Because property prices have risen at roughly twice the rate of incomes, you could, as a crude simplification, say it has become twice as hard to accumulate a deposit by saving the same percentage of your income,” he said.

“Because interest rates are lower and most people save their deposits on houses in the form of bank deposits, the additional assistance they get from the return on that deposit as they save for it is much less. So saving for a deposit has become both a bigger task and a more difficult one to achieve for any given level of deposit than it would have been 20, 30, 40 years ago.”

Property investors have also played a role, by increasing the “demand for rental housing by squeezing out people who would have otherwise bought those properties in order to live in them,” Mr Eslake argued.

He recommended the removal of tax concessions for investors, noting the equivalents of negative gearing had been abolished in the US and in the UK by conservative governments.

“I would say, if you dampened some of the demand that has come from investors over the last 25 years that has clearly contributed to upward pressure on property prices, you would probably do more than any other single thing to slow the rate of increase in house prices,” he said.

Further, having more people forced out of home ownership is expected to create issues for other enters. Mr Eslake reflected on the 10-15 per cent cohort whose incomes would have been enough to buy a house previously.

“Because those people are reasonably well-off they can afford to rent in the private rental market,” he said.

“But because those people can afford to pay private rents, they’ve forced up the rents that are faced by people who never would have been able to own their own homes and have thus compounded the difficulties that those people who would always [be] lifetime renters faced.”

The economist cautioned there will be longer-term consequences for Australia’s retirement income system, when more and more people exit the workforce without ever owning their home, while social and public housing supply has not kept up with demand.

He also warned that a side effect of declining home ownership could be a negative impact for the small-business sector.

“It’s very common for someone who starts a small business to have their house on the line in order to get the finance they require,” Mr Eslake said.

“Indeed, I’d argue that among the longer term adverse consequences of the decline in homeownership rates in Australia is that it may be more difficult for people to start and operate small businesses because fewer of them will have homes that they can use as security for business loans.”

During other hearings for the housing affordability inquiry, researchers added to calls for the government to set a national housing agenda and to assign a minister for housing.

Reserve Bank of Australia assistant governor (economic) Luci Ellis acknowledged that maintaining the cash rate at record lows had pushed up house prices by allowing consumers to service a larger mortgage on the same income.

However, she stated the alternative, a higher cash rate, would have resulted in higher inflation than offshore peers and economic instability.

Meanwhile, three of the big four banks have tipped that the surge in house prices will moderate in 2022, before seeing some level of reversal in 2023.

ANZ has projected a 4 per cent fall in 2023 following a 6 per cent rise across capital cities in 2022.

CBA has forecast the largest fall of 10 per cent in 2023, after a 7 per cent rise in 2022.

Westpac on the other hand has projected 8 per cent price growth in 2022, before a 5 per cent correction in 2023.

Source: MortgageBusiness

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We haven’t seen it in years. The RBA  has not raised interest rates for more than 130 months. But we all knew it had to come at some point. It seems that time has come.

We have seen the biggest movement in interest rates for a long time, but it’s not due to the RBA. Banks are taking action and increasing their interest rates.

CBA was the first to move. It took a machete to its flagship basic variable rate, cutting it by 40 points; but to make that balance out on the books, it increased all other major fixed rates. Westpac was second in line, raising its rates for two-, three-, four- and fi ve-year fixed interest rate loans.

Why are fixed rates going up?

Managing director and founder of Finsure, John Kolenda, explained.

There’s an inverse relationship between interest rates and inflation; if one rises the other has to fall. The RBA has flagged no interest rate rises until 2024. The only reason for an earlier rise would be to seize rising inflation and drop it back to where it needs to be.

Kolenda believes there is pressure on inflation. We have seen this in the increasing cost of goods and services throughout the COVID pandemic.

This could mean the RBA is forced to review interest rates earlier than planned.

Other indicators of inflation are bond prices and the price of money. The RBA has used bonds and funding terms to support the economy throughout COVID, with a lot of success. As it reduces the support, this can lead to inflationary pressure.

Banks borrow from overseas and could be paying a higher rate. This, and rebounding economies, also builds inflationary pressure.

How does this lead to banks increasing rates?

As the cost of money and borrowing rises, banks will increase rates to compensate.

Inflationary pressure is high in the US and New Zealand as these economies rebound from COVID. The same is expected in Australia soon.

Cashed-up customers are coming out of lockdown ready to spend. Confidence is increasing, as is the cost of goods and services. Pressure to increase wages is expected as businesses struggle to find staff. All of these pressures will lead to increasing inflation and the banks needing to raise interest rates to claw back costs. Westpac and CBA moved first; it’s expected that other banks will follow shortly.

Other regulatory influences

Cashed-up buyers coming out of lockdown want to buy new homes. It’s not just the weather that’s heating up; the real estate market is too. While it’s a great boost if your nest egg is in your home and you are looking to cash out and downsize, it’s not all good news. Skyrocketing prices put pressure on affordability and the cost of living; together with inflation, it’s a recipe for disaster.

To reduce the impacts of skyrocketing house prices and inflation risks, APRA has recently made some changes to mortgage lending, because it’s concerned about people borrowing more than they can service when interest rates are likely to go up. APRA has increased the interest rate buffer that banks must apply to loans at application stage from 2.5% to 3%. This means borrowing capacity is reduced.

What this means for buyers 

This buffer rate rise does not affect an existing mortgage, and the interest rate won’t change. What will change is how the bank, during the application process, views a borrower’s ability to service a loan.

It also won’t affect the customer if they are not borrowing at their maximum capacity. The biggest impact will be on investors who are more likely to be borrowing closer to their limit than owner-occupiers.

What this means for sellers

Given only a small percentage of customers borrow at capacity (CBA reports 8%), sellers can still expect high property demand.

Source: BrokerNews

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