How the coronavirus could impact Australia’s property market

How the coronavirus could impact Australia’s property market

As Australia experiences a steep rise in confirmed cases of COVID-19 and a recession becomes more likely, concerns over the pandemic’s impact on the property market are mounting.

Interest rate to remain lower for longer

For the second time in March 2020, the Reserve Bank of Australia cut the official cash rate to a new record low of 0.25 per cent in an emergency move to support the economy facing challenges due to the coronavirus.

RBA governor Philip Lowe said that the Board would not increase the interest rate “until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2-3 per cent target band”.

“This means that we are likely to be at this level of interest rates for an extended period,” Dr Lowe said.

“Before the coronavirus hit, we were expecting to make progress towards full employment and the inflation target, although that progress was expected to be only very gradual. Recent events have obviously changed the situation and we are now likely to remain short of those objectives for somewhat longer.”

He added that the priority for the RBA at this stage is to “support jobs, incomes and businesses”, propping Australia up to a position where it can recover strongly.

The RBA has not made an out-of-cycle rate cut since 1997.

Recession and unemployment

AMP Capital’s chief economist Shane Oliver believes one of the biggest risks facing the property market is the prospective recession and the uptick in unemployment a recession could cause.

Dr Oliver expects at least two negative quarters of gross domestic product (GDP) growth in the first and second quarters of 2020, with the possibility of a third straight negative quarter as well. This is due to large parts of the economy – including tourism, travel and entertainment, which would also impact retail – effectively shutting.

AMP Capital’s base case – or the scenario the firm considers most likely to occur according to their financial modelling – suggests unemployment may rise to about 7.5 per cent, which could push property prices down by some 5 per cent.

This would then be followed by “a property market recovery into next year as the economy bounces back and pent-up demand is unleashed again helped by ultra-low interest rates”.

In the most extreme projected scenario, where unemployment rises to 10 per cent or more, housing prices could fall by about 20 per cent, as such a high jobless rate could cause a higher number of defaults, forced property sales and less spending.

Such a scenario could risk “tripping up the underlying vulnerability of the Australian housing market flowing from high household debt levels and high house prices”, Dr Oliver wrote.

He emphasised that this extreme scenario is not their base case and noted that the recent 9 per cent price growth in average capital city markets since mid-2019 would partly help in buffering any price falls.

Coronavirus hits consumer confidence

The latest figures from CoreLogic paint a picture of a recovering property market, with the national median value surging by 6.1 per cent to about $550,000 in the 12 months to February 2020. And both Sydney and Melbourne returned to double-digit annual growth, hitting median prices of about $872,000 and $689,000 respectively.

But the rosy data pre-dates the country’s rapid spike in coronavirus cases in mid to late March.

In a statement released on the day of the RBA’s emergency rate cut, CoreLogic said while a rate cut in normal circumstances could typically bring up buyer sentiment in the housing market, it did not anticipate the same response this time. 

“We do not expect this latest move by the RBA will increase housing demand while confidence levels are so weak and uncertainty is extreme.”

Strong buyer confidence and demand typically translates to higher property values and sharper price growth.

CoreLogic said low consumer confidence will take its toll on property buyers and owners considering selling.

“Transaction activity is likely to suffer more, as buyers and sellers retreat to the sidelines until some certainty returns to their decision making. This has been the outcome through historic periods of negative economic shocks,” it wrote.

But that outcome was only expected if the negative impacts of the coronavirus does not linger for more than a few months.

“A more sustained economic downturn would likely see households struggling with higher unemployment and underemployment.”

If you are worried about mortgage repayments during this uncertain period, consider using RateCity’s Mortgage Stress calculator to see if you might fall into mortgage stress.

You could also give your bank a call to find out what they are doing for customers in financial hardship due to the coronavirus.

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Learn more about home loans

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

How much deposit will I need to buy a house?

A deposit of 20 per cent or more is ideal as it’s typically the amount a lender sees as ‘safe’. Being a safe borrower is a good position to be in as you’ll have a range of lenders to pick from, with some likely to offer up a lower interest rate as a reward. Additionally, a deposit of over 20 per cent usually eliminates the need for lender’s mortgage insurance (LMI) which can add thousands to the cost of buying your home.

While you can get a loan with as little as 5 per cent deposit, it’s definitely not the most advisable way to enter the home loan market. Banks view people with low deposits as ‘high risk’ and often charge higher interest rates as a precaution. The smaller your deposit, the more you’ll also have to pay in LMI as it works on a sliding scale dependent on your deposit size.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

How much debt is too much?

A home loan is considered to be too large when the monthly repayments exceed 30 per cent of your pre-tax income. Anything over this threshold is officially known as ‘mortgage stress’ – and for good reason – it can seriously affect your lifestyle and your actual stress levels.

The best way to avoid mortgage stress is by factoring in a sizeable buffer of at least 2 – 3 per cent. If this then tips you over into the mortgage stress category, then it’s likely you’re taking on too much debt.

If you’re wondering if this kind of buffer is really necessary, consider this: historically, the average interest rate is around 7 per cent, so the chances of your 30 year loan spending half of its time above this rate is entirely plausible – and that’s before you’ve even factored in any of life’s emergencies such as the loss of one income or the arrival of a new family member.

What is the best interest rate for a mortgage?

The fastest way to find out what the lowest interest rates on the market are is to use a comparison website.

While a low interest rate is highly preferable, it is not the only factor that will determine whether a particular loan is right for you.

Loans with low interest rates can often include hidden catches, such as high fees or a period of low rates which jumps up after the introductory period has ended.

To work out the best value for money, have a look at a loan’s comparison rate and read the fine print to get across all the fees and charges that you could be theoretically charged over the life of the loan.

What is the difference between a fixed rate and variable rate?

A variable rate can fluctuate over the life of a loan as determined by your lender. While the rate is broadly reflective of market conditions, including the Reserve Bank’s cash rate, it is by no means the sole determining factor in your bank’s decision-making process.

A fixed rate is one which is set for a period of time, regardless of market fluctuations. Fixed rates can be as short as one year or as long as 15 years however after this time it will revert to a variable rate, unless you negotiate with your bank to enter into another fixed term agreement

Variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts however fixed rates do offer customers a level of security by knowing exactly how much they need to set aside each month.

How much of the RBA rate cut do lenders pass on to borrowers?

When the Reserve Bank of Australia cuts its official cash rate, there is no guarantee lenders will then pass that cut on to lenders by way of lower interest rates. 

Sometimes lenders pass on the cut in full, sometimes they partially pass on the cut, sometimes they don’t at all. When they don’t, they often defend the decision by saying they need to balance the needs of their shareholders with the needs of their borrowers. 

As the attached graph shows, more recent cuts have seen less lenders passing on the full RBA interest rate cut; the average lender was more likely to pass on about two-thirds of the 25 basis points cut to its borrowers.  image002

What is appreciation or depreciation of property?

The increase or decrease in the value of a property due to factors including inflation, demand and political stability.

Will I be paying two mortgages at once when I refinance?

No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.