A Property Market We Have Never Seen Before!

We are currently witnessing a pattern in the property market that has never been seen before and is unlikely to be seen again.

In previous downturns, the major driver behind price falls was a glut of forced sales that pushed property prices down.

In the current market, it is a reduction in borrowing capacity that is forcing prices lower, however I am happy to report some areas seem to be staying firm with prices staying strong.

To emphasise this point, the ANZ released an article last week that used three graphs to illustrate why economists and banks are united in their beliefs that prices will fall significantly over the next eighteen months.

The graphs that you will see below show the ANZ's house price forecasts, mortgage borrowing capacity based on different interest rate levels and also a snapshot of where Regional prices are currently which includes the Gold Coast property market.

Of particular interest is the Mortgage borrowing capacity calculator.

Under the ANZ's model, you can clearly see why property prices are tipped to fall as interest rates rise.

In real terms, earlier this year the average new Australian mortgage was around $630,000.

The Reserve Bank has predicted that the cash rate will rise from 0.10% which it was earlier this year to 3.1% in 2023. The ANZ has predicted the cash rate will hit 3.35% next year.

Using these forecasts, a borrower approved for a $630,000 loan earlier this year will have their borrowing capacity reduced to approx $450,000, almost a 30% reduction.

Using the RBA & ANZ models, let's say a premium buyer purchased a $1,250,000 home in Robina earlier this year with a $250,000 deposit and $1,000,000 loan approval. The same family will soon qualify for approx a $700,000 loan leaving a maximum purchase price of $950,000.

There is a clear message here for our current and future sellers.

For every interest rate rise, a buyer's ability to meet your price expectation falls so the sooner you either meet the market or come to market the better your chances are of getting a strong price.

With the cost of living rising at an incredible pace and wage growth still well behind inflation, those tipping price falls are not making their assumptions based on consumer confidence, previous property trends or gut feel.

No matter how much a buyer may want a property and regardless of that buyer's deposit, the fact is that anyone needing a loan to complete a purchase will have their borrowing capacity slashed as each rate rise kicks in.

This is why prices are falling and why the trend is set to continue.

Please see below graphs from the ANZ report.

Please see below our lead article this week from Domain.com.au that discusses the current state of the property market.

Domain boss says the housing market is 'tempering', not crashing, as property downturn continues

Australian house prices may be falling at their fastest pace in more than a decade, but the chief executive of real estate website Domain has argued the property market is simply going from red hot to normal.

Jason Pellegrino said although listing and transaction volumes were still high over the second half of the last financial year, there was "a tempering of the overall heat" in the market.

"Prices have started to decline, listing activity has started to temper as well," he told ABC's The Business program.

Property prices enjoyed extraordinary growth during the pandemic – thanks largely to record low interest rates at the time.

On average, nationally, prices jumped 28.6 per cent from mid-2020 to April 2022, when the property market hit its peak.

There's no 'bear' in there

Since the Reserve Bank started to hike rates in May to curb surging inflation, there has been an obvious slowdown in housing activities.

House prices have fallen for three months in a row as home buyers see their borrowing capacity reduced and contemplate whether they can afford rising mortgage repayments in a high inflation and low wages environment.

But Mr Pellegrino said the downturn did not mean the market was moving into "bear territory" but was instead stabilising and returning to normal.

"Agents, vendors and buyers are having to meet in the middle, having to have logical and rational discussions rather than a situation that we saw last year where there was a lack of supply and a really strong demand curve, particularly driven by FOMO (fear of missing out).

"Buyers were driving prices higher, chasing acquisitions in an environment where there was a lack of stock. We are starting to see that balance out."

Mr Pellegrino added that, as the market came off, it was closing the price gap between apartments and houses.

"That is reducing what a year ago was the largest gap between house and apartment pricing."

'Taking longer to sell homes'

According to his company's main competitor REA Group's latest listings report, the total supply of properties available for sale has surprisingly lifted in July, up 0.6 per cent month-on-month.

Compared to this time last year, the total supply of properties listed for sale increased by 4.9 per cent, the largest year-on-year increase since 2010.

Sydney recorded its largest ever year-on-year increase in total stock available, up 30.7 per cent this year compared to lockdown-affected levels in July 2021.

"It is also partly driven by the fact that options were limited in July 2021, with a number of capital cities in lockdown," PropTrack economist and report author Angus Moore said.

"At the same time, buyers have had more properties to choose from in recent months."

More housing for sale combined with weaker demand means house price falls will likely continue.

Domain is forecasting house price falls of up to 15 per cent from peak to trough, which is slightly smaller than ANZ's prediction of an 18 per cent decline. 

According to data from ANZ and CoreLogic, the national median house price could drop by more than $150,518 by the end of next year.

Sydney's median house price could fall even further, with an estimated drop of $204,543 between July 2022 and the end of 2023, taking it to $1,141,650.

Homeowners with negative equity could face 'mortgage prison'

There have been warnings that first home buyers who took advantage of the federal government's low deposit schemes, such as the First Home Guarantee, could be hit hardest by the property downturn as it would be more difficult for them to refinance.

Lenders generally require borrowers to own at least 20 per cent of their property in order to refinance, otherwise their new lender will hit them with costly lenders' mortgage insurance, which could negate any potential savings.

Borrowers with very low or negative equity are likely to find lenders are not willing to take them on at all.

Based on an analysis by RateCity using ANZ's property forecasts, if someone bought a median-priced house in Sydney in December 2021 with a 10 per cent deposit, they could owe the bank 8 per cent more than their home is worth by the end of 2023.

That means even with the hope of a housing rebound in 2024, falling property prices could force some borrowers into "mortgage prison", RateCity's research director Sally Tindall warned.

"Increasing numbers of people will find themselves trapped in mortgage prison, stuck with their current lender, until they can build their equity above 20 per cent," she said.

As real wages growth continue to fall across the country, and with jobs figures showing some early signs of weakening, some economists predict that could prompt the RBA to slow the pace of rate rises at the next board meeting in September — from half-a-percentage-point rate hikes to 0.4 or 0.25 of a percentage point.