Housing market shrinks for fifth month, but there’s signs of a recovery

Housing market shrinks for fifth month, but there’s signs of a recovery

Rising consumer confidence, more property listings and generally increasing housing values weren’t enough to offset the falling values of properties in the largest two capital cities, analysts have said, ultimately leading to Australia’s fifth month of falling property prices.

Average home values across the nation fell by 0.1 per cent in September, according to CoreLogic’s Hedonic Home Value Index, representing the smallest drop since the COVID-19 coronavirus struck. 

Melbourne and Sydney, which account for 40 per cent of housing stock and 55 per cent of values, fell a respective 0.9 and 0.3 per cent in September, while the six other capital cities experienced gains.

CoreLogic dwelling values for September.JPG

The pandemic’s toll on the major cities anchored the average property growth across the country, Tim Lawless said, head of research at CoreLogic.

“Since peaking in March, Melbourne values are down 5.5 per cent,” he said. “With restrictions starting to lift and private home inspections once again permitted, we expect to see activity lift in October.”

Property values are growing in most areas

The 0.1 per cent average fall is torn between two trends: a 0.2 per cent drop in the combined capital city average, and a 0.4 per cent lift in regional property values.

Changes in lifestyles brought about by the pandemic have seen more people want to live in regional properties, Mr Lawless said

“(We’re) observing a transition of demand away from the cities towards the major regional centres, particularly those that are adjacent to the larger capitals where residents can commute back to the cities if required,” he said. 

“Remote working arrangements are no doubt a factor in supporting demand in these markets, but lifestyle opportunities and a desire for lower density housing options are also playing a part.”

Other organisations have observed the shift in preference towards regional lifestyles, including SQM Research, the Property Investment Professionals of Australia and Domain.

Regional properties did experience modest drops from lower prices since coronavirus lockdowns swept the country in late March, CoreLogic said, but they have chartered a quicker and stronger recovery than city property values. 

Whereas regional values slipped 0.8 per cent since March, capital city values fell 2.6 per cent on average. 

Why housing values haven’t fallen more, bucking forecasts

Economists, analysts and experts anticipated housing price falls of 10 to 15 per cent across the nation, but the property market has proved to be more resilient -- for a number of reasons. 

One key reason has to do with people not having to sell off their house because they can’t meet their mortgage commitments, Mr Lawless said.

“We aren’t seeing any signs of a rise in distressed listings or stock starting to pile up in the market,” he said. 

“In fact, the opposite seems to be true, where new listings are being absorbed by the market faster than the rate at which they are being added.”

The coming months will be a critical test for the housing market as people resume mortgage repayments after deferrals end, and the government payments including JobSeeker and JobKeeper are reduced.

Westpac’s chief economist forecasts about 60,000 homes will be sold as distressed sales due to the changes from next year.

“A rise in urgent or distressed listings would provide a further test for the resilience of housing values,” Mr Lawless said.

Fewer homes are for sale, propping prices

There’s 25 per cent less homes advertised for sale on the property market, when compared to the five year average, and the constrained supply is slowing the drop in property prices, CoreLogic said. 

Compared to the same time a year ago, property listings are down 22 per cent.

“The imbalance between available supply and housing demand is one of the reasons why housing values have hardly fallen through the COVID period so far,” Mr Lawless said. 

“It helps to explain the recent upwards trend in values across some cities.”

Data from the Australian Bureau of Statistics indicates the typical house dropped about $12,500 since the beginning of the year.

But the outlook for property values remains uncertain.

On the one hand, mortgage deferrals are beginning to expire, unemployment is high and government payments are being reduced. On the other, interest rates on mortgages are at historic lows, the market is not flooded with an oversupply of houses and consumer sentiment is on the rise. 

“The aggregate effect … seems to be outweighing the negative economic shock brought about by the pandemic, “ Mr Lawless said.

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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.

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.

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.

How much can I borrow with a guaranteed home loan?

Some lenders will allow you to borrow 100 per cent of the value of the property with a guaranteed home loan. For that to happen, the lender would have to feel confident in your ability to pay off the mortgage and in the security provided by your guarantor.

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.

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.

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.