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

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.

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.

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 the best interest rate for a mortgage?

The fastest way to find out what the lowest interest rates on the market are is to use a comparison website.

While a low interest rate is highly preferable, it is not the only factor that will determine whether a particular loan is right for you.

Loans with low interest rates can often include hidden catches, such as high fees or a period of low rates which jumps up after the introductory period has ended.

To work out the best value for money, have a look at a loan’s comparison rate and read the fine print to get across all the fees and charges that you could be theoretically charged over the life of the loan.

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.

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.

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.

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

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.