Housing market loses steam, prices fall for four straight months

Australian housing values edged down by 0.4 per cent in August, marking the fourth consecutive month of falling prices due to COVID-19, new CoreLogic data showed.

Melbourne’s property market was the hardest hit, with values weakening by 1.2 per cent to $667,520 in August, following a similar contraction in July

Sydney housing prices fell by 0.5 per cent to $860,182 over the month, while Brisbane dwelling values were down by 0.1 per cent to $503,128.

CoreLogic.JPG

Source: CoreLogic.

CoreLogic noted while property prices have been trending down during COVID-19, the declines had been slower in July and August. Values saw no changes or small growths in five of the eight capitals in August: Adelaide, Perth, Hobart, Darwin and Canberra.

CoreLogic’s head of research, Tim Lawless, said the Melbourne market’s August results pulled down the national figures.

“(Melbourne’s August result was) the largest fall recorded amongst the capital cities, demonstrating the impact of a worse viral outbreak relative to other cities, along with a larger demand side impact from stalled overseas migration,” he said.

“Through the COVID period to date, Melbourne home values have fallen by 4.6 per cent.”

While property values in the combined capitals fell by 0.5 per cent in August, prices saw no change in the combined regional markets, outperforming the larger cities across the country. 

Mr Lawless attributed this primarily to the plummeting overseas migration since COVID-19 – a factor which has hit capital cities that rely on migrant demand, but has largely not affected regional areas.

Property owners hesitant to list their homes for sale

While the property market has slowed since the pandemic hit, one of the factors that have helped protected prices from fall further is the low level of live property listings, according to Mr Lawless.

New listing numbers are on the decline, dipping by 11.5 per cent in August. This followed significant drops between mid-March and the first week of May, when listing numbers halved. It then bounced back by 48 per cent in the three months to August.

“Through the COVID pandemic to-date, active listing numbers have remained extremely low, demonstrating both a lower than average amount of fresh stock being added to the market, and a strong rate of absorption,” Mr Lawless said.

And new figures released today from SQM Research showed the number of residential property listings wound down by 6.3 per cent to 293,053 in August nationally. This is down by 10 per cent from 12 months ago.

Listing numbers fell the most in Melbourne, where it plunged by about 13 per cent in August alone.

“It is reflective of the near entire freeze-up of the Melbourne housing market,” Louis Christopher, SQM Research managing director, said.

Mr Lawless pointed out that there have not been significant jumps in urgent or distressed listings.

“This could potentially change however as fiscal support starts to taper at the end of September and distressed borrowers taking a repayment holiday reach their six-month check-in period around the same time. The timing of these two events could be the catalyst for a gradual rise in distressed listings which will be an important trend to monitor,” Mr Lawless said.

But if the number of listings soar higher than levels seen in previous years, vendors may need to consider discounting their properties at greater rates when selling. 

What could happen to Australia’s property market?

In a widely expected move, the Reserve Bank of Australia left the cash rate untouched today at 0.25 per cent. Interest rates are expected to remain at record low levels for at least three years, according to Prime Minister Scott Morrison, speaking in the August national cabinet meeting.

For mortgage holders and property buyers, lower interest rates may ease the pressure off home loan repayments and encourage sales activity by making it potentially easier for buyers to enter the housing market

However, the performance of property markets could depend on the containment of COVID-19, as well as how reliant markets are on overseas migration, Mr Lawless said.

He added that while there is a “high” risk that property prices could drop further, the federal budget, due to be handed down on October 6, may help point to how housing markets could move.

Shane Oliver, AMP Capital’s chief economist, said it was likely that housing values could fall further in the next six to 12 months, while forced sales may jump due to high unemployment, the collapse in immigration, and the depressed rental market.

“JobKeeper, increased JobSeeker, bank payment holidays and other support measures have so far helped head off a sharp collapse in prices, but the market has still weakened anyway in Melbourne and Sydney and we expect further falls as support measures start to be tapered from the December quarter,” Mr Oliver said, adding that Sydney and Melbourne are likely to be the most vulnerable markets.

Month-on-month property price changes since COVID-19

Month Nationally (%) Sydney (%) Melbourne (%)
March +0.7 +1.1 +0.4
April +0.3 +0.4 -0.3
May -0.4 -0.4 -0.9
June -0.7 -0.8 -1.1
July -0.6 -0.9 -1.2
August -0.4 -0.5 -1.2

Source: CoreLogic.

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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.

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.

Does Australia have no-deposit home loans?

Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.

However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.

Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.

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 is a loan-to-value ratio (LVR)?

A loan-to-value ratio (otherwise known as a Loan to Valuation Ratio or LVR), is a calculation lenders make to work out the value of your loan versus the value of your property, expressed as a percentage.   Lenders use this calculation to help assess your suitability for a home loan, and whether you need to pay lender’s mortgage insurance (LMI). As a general rule, most banks will require you to pay LMI if your loan-to-value ratio is 80 per cent or more.   LVR is worked out by dividing the loan amount by the value of the property. If you are looking for a quick ball-park estimate of LVR, the size of your deposit is a good indicator as it is directly proportionate to your LVR. For instance, a loan with an LVR of 80 per cent requires a deposit of 20 per cent, while a 90 per cent LVR requires 10 per cent down payment. 

LOAN AMOUNT / PROPERTY VALUE = LVR%

While this all sounds simple enough, it is worth doing a more accurate calculation of LVR before you commit to buying a place as there are some traps to be aware of. Firstly, the ‘loan amount’ is the price you paid for the property plus additional costs such as stamp duty and legal fees, minus your deposit amount. Secondly, the ‘property value’ is determined by your lender’s valuation of the property, not the price you paid for it, and sometimes these can differ so where possible, try and get your bank to evaluate the property before you put in an offer.

What is a guarantor?

A guarantor is someone who provides a legally binding promise that they will pay off a mortgage if the principal borrower fails to do so.

Often, guarantors are parents in a solid financial position, while the principal borrower is a child in a weaker financial position who is struggling to enter the property market.

Lenders usually regard borrowers as less risky when they have a guarantor – and therefore may charge lower interest rates or even approve mortgages they would have otherwise rejected.

However, if the borrower falls behind on their repayments, the lender might chase the guarantor for payment. In some circumstances, the lender might even seize and sell the guarantor’s property to recoup their money.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

What is breach of contract?

A failure to follow all or part of a contract or breaking the conditions of a contract without any legal excuse. A breach of contract can be material, minor, actual or anticipatory, depending on the severity of the breaches and their material impact.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor. 

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What is a debt service ratio?

A method of gauging a borrower’s home loan serviceability (ability to afford home loan repayments), the debt service ratio (DSR) is the fraction of an applicant’s income that will need to go towards paying back a loan. The DSR is typically expressed as a percentage, and lenders may decline loans to borrowers with too high a DSR (often over 30 per cent).