Property values shrink in capital cities as COVID-19 casts uncertainty: CoreLogic

Australia’s sale and rental property market fell for a third month in a row led by drops in its largest cities, new data shows, testing its resilience as the country grapples with a pandemic.

The data, released by industry giant CoreLogic, comes as Melbourne braces for a second lockdown to cope with rising COVID-19 infections, and as government support payments taper away later this year.

Owner and renting markets take a hit

Property value in Melbourne dropped by 1.2 per cent and Sydney dropped by 0.9 per cent in the month of July, according to CoreLogic’s Home Value Index report, leading a contraction of property prices across Australia of 0.6 per cent.

Despite three consecutive months of contractions, the housing market has proven to be resilient in dealing with the unique challenges presented by the COVID-19 pandemic, Tim Lawless said, head of research at CoreLogic.

“The impact from COVID-19 on housing values has been orderly to-date,” he said. 

“Record low interest rates, government support and loan repayment holidays for distressed borrowers have helped to insulate the housing market from a more significant downturn.”

But Mr Lawless warned the reduction in government support -- commencing as soon as October -- skews the property market’s medium term outlook to the downside.

“Urgent sales are likely to become more common as we approach these milestones, which will test the market’s resilience,” he said.

“Similarly, the recent concerns of a second wave of the virus, and the potential for renewed border closures and stricter social distancing policies are likely to further push consumer sentiment down. This is likely to weigh on both home buying and selling activity more broadly.”

The quarterly losses haven’t been enough to offset the yearly growth of the two major cities. Sydney homes and apartments led the nation in annual growth at 12.1 percent, while Melbourne followed at 8.7 per cent.

The rental market similarly weakened in the four months to July, hitting the areas impacted by border closures the hardest. Apartments across the country had the largest drops in rent at 2.6 per cent, whereas rental income for houses dropped a comparative 0.3 per cent. 

Hobart was hit the hardest with apartments dropping 4.4 per cent in rent, followed by comparative drops in Sydney of 3.2 per cent and Melbourne of 3.1 per cent.

The drop in rent is owed to a confluence of factors, Mr Lawless said, including the:

  • COVID-19 pandemic
  • growing popularity of short stay services such as Airbnb
  • departure of temporary migrants including foreign students
  • Oversupply of intercity apartments
  • Increased unemployment in food and accommodation services, arts, and recreation services. 

“Some inner city areas of Melbourne and Sydney have seen rental listings more than double since March,” Mr Lawless said.

“Compounding this weak demand position is the surge in construction activity and investment over previous years, which has added to inner city rental supply.“ 

Property across regional Australia has been weathering the challenging economic climate more resiliently, the data shows. Across the combined regional areas, housing values were unchanged in July compared with a 0.8 per cent fall across the combined capital cities.

The market’s future is at the whim of the COVID-19 pandemic and the subsequent response, Mr Lawless said.

“As stimulus measures wind down and borrowers taking a repayment holiday face up to their debt, it’s logical to expect a rise in distressed properties coming onto the market,” he said.

“Further virus outbreaks present a clear and present danger to the depth and length of the recession, and the performance of the housing market.”

A similar sentiment was echoed a week ago in ME Bank’s Household Financial Comfort report. It noted government support payments had insulated households with little savings, and that their financial wellbeing was largely dependent on JobSeeker and JobKeeper payments.

A buyer’s market

If you’re in the market to buy an apartment or house, a drop in property prices could be welcome news. CoreLogic’s data also revealed “the demand for established housing stock is outweighing advertised supply”, recognising that there is still an appetite for buyers.

Mortgage interest rates are at an all time low and competition between lenders is strong. Take a look at RateCity’s comparison of mortgage loans to help find the right deal for you.

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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.

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.

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.

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.

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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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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).