Will Australian property prices crash?

Will Australian property prices crash?

Global financial crisis 2.0 or just a lot of hot air?

Sydney property markets appear to be cooling, leading to speculation that the Australian property market could crash. Dr Shane Oliver, Chief Economist at AMP Capital, has weighed in on the debate, and he’s not entirely convinced.

“A common narrative on the Australian housing market is that it’s in a giant speculative bubble propelled by tax breaks, low interest rates and “liar loans” that have led to massive mortgage stress and that it’s all about to go bust, bringing down the banks and the economy with it.

“Recent signs of price falls – notably in Sydney – have added interest to such a view,” explained Dr Oliver.

According to Domain Group data, Sydney house prices fell 1.9 per cent over the September quarter (around $23,000).

Dr Oliver points to three basic facts about Australian property making residential property “Australia’s Achilles heel”:

  • Property prices are expensive relative to income, rents, long-term trends and global standards;
  • Affordability is poor and saving for a deposit is extremely hard; and
  • Our debt to income ratio is on the high end of OECD countries.

However, there are five key factors to consider which make the possibility of a housing market crash “too complicated to call”:

  1. It’s dangerous to generalise

Sydney and Melbourne may have sustained rapid price gains in recent years, but they do not make up the whole Australian property market.

CoreLogic data shows that “prices in Brisbane, Adelaide, Hobart and Canberra have risen by a benign 3 to 5 per cent per annum and prices have fallen in Perth and Darwin,” said Dr Oliver.

“Australian cities basically swing around the national average with prices in one or two cities surging for a few years and then underperforming as poor affordability forces demand into other cities,” explained Dr Oliver.

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  1. Supply has not kept up with demand 

Australia’s ever growing population, up 1.6 per cent to 24.5 million over the last year according to ABS data, has not seen the supply of dwellings keep up with demand. This has led to a shortfall of supply, which has driven up home prices.

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High levels of property oversupply are an indicator of an incoming housing crash. While the recent surge in unit supply is helping to drive down prices, according to Dr. Oliver, the level we are at now means “there is no broad-based oversupply problem.”

  1. Lending standards have been improving 

Thanks to strong Australian housing market regulation, such as APRA’s crackdown on interest-only and high loan to valuation loans, we are not likely to face anything like the deterioration in lending standards other countries experienced prior to the GFC.

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By avoiding ‘dodgy practices’ and tightening lending standards, we help to ensure borrowers are better able to pay back their loans.

Dr Oliver points to recent RBA research that shows while getting into the housing market is hard, “those who make it are doing okay and bad debts and arrears are low”.

“Finally, debt interest payments relative to income are running around 30 per cent below 2008 peak levels thanks to low interest rates.

“Sure, rates will eventually start to rise again but they will need to rise by around 2 per cent to take the debt interest to income ratio back to the 2008 high,” said Dr Oliver.

In July, the RBA did state that the neutral cash rate is 3.5 per cent – a 2 percentage point rise from the current 1.5 per cent. However, Dr Oliver has previously stated that the cash rate will not rise 2 percentage points, and to not “read too much into the neutral rate”.

  1. Importance of tax breaks is exaggerated

The significance of additional factors impacting the housing market, such as tax breaks and foreign buyers, is “often exaggerated” relative to the supply shortfall, according to Dr Oliver.

“While there is a case to reduce the capital gains tax discount (to remove a distortion in the tax system), negative gearing has long been a feature of the Australian tax system and if it’s the main driver of home price increases as some claim then what happened in Perth and Darwin?”

“Similarly, foreign buying has been concentrated in certain areas and so cannot explain high prices generally, particularly with foreign buying restricted to new properties,” said Dr. Oliver.

  1. Conditions for a crash are not in place

There are a few conditions Australia would need to have to see a housing crash.

  • Higher unemployment levels – there is no sign of recession and jobs data remains strong.
  • Higher interest rates – while the RBA is likely to start raising interest rates next year, these increases will likely be small and gradual.
  • Property oversupply – approvals to build new homes are slowing, so this seems unlikely.

What is the verdict?

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While Dr Shane Oliver acknowledges the excessive house prices and debt levels are posing a risk for Australians, “it is a lot more complicated than commonly portrayed.”

“We continue to expect a slowing in the Sydney and Melbourne property markets, with evidence mounting that APRA’s measures to slow lending to investors and interest-only buyers (along with other measures, e.g. to slow foreign buying) are impacting.

“This is particularly the case in Sydney, where price growth has stalled and auction clearance rates have fallen to near 60 per cent.

“Expect prices to fall 5-10 per cent (maybe less in Melbourne given strong population growth) over the next two years.

“This is like what occurred around 2005, 2008-09 & 2012,” concluded Dr Oliver.

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Learn more about home loans

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

What do people do with a Macquarie Bank reverse?

There are a number of ways people use a Macquarie Bank reverse mortgage. Below are some reasons borrowers tend to release their home’s equity via a reverse mortgage:

  • To top up superannuation or pension income to pay for monthly bills;
  • To consolidate and repay high-interest debt like credit cards or personal loans;
  • To fund renovations, repairs or upgrades to their home
  • To help your children or grandkids through financial difficulties. 

While there are no limitations on how you can use a Macquarie reverse mortgage loan, a reverse mortgage is not right for all borrowers. Reverse mortgages compound the interest, which means you end up paying interest on your interest. They can also affect your entitlement to things like the pension It’s important to think carefully, read up and speak with your family before you apply for a reverse mortgage.

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

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.

Is a second mortgage tax deductible?

If you take out a loan to invest in a property, you can claim a tax deduction on the interest you pay as long as the property is earning income. In other words, if you rent the property for the entire year, you can claim a tax deduction for 12 months of interest payments. But, if you use the home for six months and rent it for the other six months, you can claim deduction only for 50 per cent of the interest amount.

You also get tax benefits for items that lose value over the years. But, the entire amount is not allowed as a tax deduction in the same year; instead you’ll have to claim a portion each year over a number of years. 

Additional borrowing costs, such as maintenance fees, stamp duty, offset account setting up fees, Lenders Mortgage Insurance (LMI), and establishment fees, can also be claimed as tax deductions.

Before you claim second mortgage tax deductions, it’s often worth checking with an experienced tax expert.

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 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 deposit do I need for a home loan from ANZ?

Like other mortgage lenders, ANZ often prefers a home loan deposit of 20 per cent or more of the property value when you’re applying for a home loan. It may be possible to get a home loan with a smaller deposit of 10 per cent or even 5 per cent, but there are a few reasons to consider saving a larger deposit if possible:

  • A larger deposit tells a lender that you’re a great saver, which could help increase the chances of your home loan application getting approved.
  • The more money you pay as a deposit, the less you’ll have to borrow in your home loan. This could mean paying off your loan sooner, and being charged less total interest.
  • If your deposit is less than 20 per cent of the property value, you might incur additional costs, such as Lenders Mortgage Insurance (LMI).

How much deposit do I need for a home loan from NAB?

The right deposit size to get a home loan with an Australian lender will depend on the lender’s eligibility criteria and the value of your property.

Generally, lenders look favourably on applicants who save up a 20 per cent deposit for their property This also means applicants do not have to pay Lenders Mortgage Insurance (LMI). However, you may still be able to obtain a mortgage with a 10 - 15 per cent deposit.  

Keep in mind that NAB is one of the participating lenders for the First Home Loan Deposit Scheme, which allows eligible borrowers to buy a property with as low as a 5 per cent deposit without paying the LMI. The Federal Government guarantees up to 15 per cent of the deposit to help first-timers to become homeowners.

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.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

What is a redraw fee?

Redraw fees are charged by your lender when you want to take money you have already paid into your mortgage back out. Typically, banks will only allow you to take money out of your loan if you have a redraw facility attached to your loan, and the money you are taking out is part of any additional repayments you’ve made. The average redraw fee is around $19 however there are plenty of lenders who include a number of fee-free redraws a year. Tip: Negative-gearers beware – any money redrawn is often treated as new borrowing for tax purposes, so there may be limits on how you can use it if you want to maximise your tax deduction.