Government stimulus and low interest rates prop up declining property market

Government stimulus and low interest rates prop up declining property market

Property prices have tumbled nationally due to COVID-19, but government stimulus, mortgage deferral schemes and rock bottom interest rates have helped cushion the falls.

Across the combined capitals, house prices have dropped by 2 per cent and unit prices by 2.2 per cent in the three months to June 2020, according to Domain Group data.

On an annual basis, property values were still in positive territory, with houses and units up by 6.6 per cent and 4.5 per cent respectively in the 12 months to June 2020.

Domain senior research analyst, Nicola Powell, said it was the first quarter where COVID-19 impacts were beginning to show, with values rolling back to where they were before the price recovery.

“While most capital cities declined, the falls have been minimal to-date as unprecedented government stimulus, mortgage holidays, low stock levels and record low interest rates shield values from any significant declines, helping to retain stability in the housing market,” Dr Powell said.

She added that stimulus measures and bank support through mortgage deferrals has kept the number of distressed sales low, which may in turn prop up property prices.

Yet the economy’s performance after government support, such as JobKeeper, ends would largely determine the national outlook for prices.

“The risk to prices becomes greater once the stimulus measures cease and we face the fiscal cliff,” Dr Powell said.

How have property prices moved during COVID-19?

Canberra property prices showed the greatest resilience, with houses shooting up by 4.1 per cent in the June quarter despite COVID-19. The national capital’s units fell by 1.3 per cent, the smallest decline for units in the country.

In Sydney, house prices came down by 2 per cent, or $23,000, in the June quarter, while unit prices declined by 1.9 per cent, or $14,000.

Real estate values in the harbour city were picking up pre-pandemic, with houses and units growing by 10.5 per cent and 7.3 per cent respectively. 

“House prices are $110,000 above the early 2019 trough but remain $55,000 below the mid-2017 peak. Unit prices are $50,000 above the mid-2019 trough but remain $52,000 below the mid-2017 peak.” 

Sydney is still the only capital city with median house prices in the million-dollar club.

Melbourne suffered the most among the country’s house market, with prices plunging by 3.5 per cent, or $32,000, in the three months to June. Unit values have held up better than houses, dropping by 1.7 per cent, or about $9,000.

“Prior to this, Melbourne house prices had made a full recovery from the 2017-19 slump. This quarter marks the first fall since early 2019 and is the deepest quarterly fall of all the major capital cities,” Dr Powell said.

She noted that the second lockdown the city is undergoing may stall buyer momentum temporarily.

House and unit prices in the June 2020 quarter

  Change in value – Q1 vs Q2 Change in value – year-on-year House median price Unit median price
Sydney

Houses: -2.0%

Units: -1.9%

Houses: 10.5%

Units: 7.3%

$1,143,012 $735,417
Melbourne

Houses: -3.5%

Units: -1.7%

Houses: 6.9%

Units: 6.5%

$881,369 $537,345
Brisbane

Houses: -1.4%

Units: -4.1%

Houses: 2.4%

Units: -8.2%

$582,847 $375,285
Adelaide

Houses: 0.2%

Units: -2.9%

Houses: 3.0%

Units: -2.1%

$553,036 $319,266
Perth

Houses: -1.5%

Units: -4.9%

Houses: -1.4%

Units: -0.1%

$522,414 $334,284
Hobart

Houses: 1.4%

Units: -1.5%

Houses: 10.0%

Units: 17.3%

$529,388 $429,464
Canberra

Houses: 4.1%

Units: -1.3%

Houses: 9.3%

Units: -2.0%

$819,090 $453,750
Darwin

Houses: -1.0%

Units: -3.7%

Houses: -0.1%

Units: -20.8%

$516,213 $241,461
Combined capitals

Houses: -2.0%

Units: -2.2%

Houses: 6.6%

Units: 4.5%

$804,602 $560,838

Source: Domain Group.

Is it a good time to buy a property?

While property prices may be falling, home loan rates are at their lowest the market has seen.

The lowest fixed mortgage rate on the RateCity database is 1.99 per cent, from Bank of Us. But this rate is only available to Tasmanian residents. The lender was the first in the market to bring a mortgage rate of less than 2 per cent to the market.

It is also possible to secure a variable rate below 2 per cent, with Loans.com.au offering a 1.99 per cent introductory rate. However, this rate only lasts for 12 months, and the rate will revert to 2.57 per cent after this period end. 

For some, it could be a good time to buy a property if you have a secure income and have a substantial deposit saved up.

Others who may be worried about the ongoing impacts of COVID-19 may want to wait and see before diving into the property market and committing to a 30-year home loan. Some may also want to keep their cash close for emergency purposes as uncertainty grows.

Your best course of action may depend on your financial situation and priorities. It’s best to seek professional financial advice before committing to a home loan.

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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.

What is a low-deposit home loan?

A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.

For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.

As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.

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.

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.

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.

How can I avoid mortgage insurance?

Lenders mortgage insurance (LMI) can be avoided by having a substantial deposit saved up before you apply for a loan, usually around 20 per cent or more (or a LVR of 80 per cent or less). This amount needs to be considered genuine savings by your lender so it has to have been in your account for three months rather than a lump sum that has just been deposited.

Some lenders may even require a six months saving history so the best way to ensure you don’t end up paying LMI is to plan ahead for your home loan and save regularly.

Tip: You can use RateCity mortgage repayment calculator to calculate your LMI based on your borrowing profile

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.

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.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.

I can't pick a loan. Should I apply to multiple lenders?

Applying for home loans with multiple lenders at once can affect your credit history, as multiple loan applications in short succession can make you look like a risky borrower. Comparing home loans from different lenders, assessing their features and benefits, and making one application to a preferred lender may help to improve your chances of success

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.

If I don't like my new lender after I refinance, can I go back to my previous lender?

If you wish to return to your previous lender after refinancing, you will have to go through the refinancing process again and pay a second set of discharge and upfront fees. 

Therefore, before you refinance, it’s important to weigh up the new prospective lender against your current lender in a number of areas, including fees, flexibility, customer service and interest rate.