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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How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

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.

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.

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).

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.

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 long does NAB home loan approval take?

The time required to get your home loan from NAB approved can vary based on a number of factors involved in the application process. 

Once you have applied for a home loan, a NAB specialist will contact you within 24 hours over the phone to take down relevant information, including your total income, debts (existing loans, credit cards, etc.), assets (car, shares, etc.), and your monthly expenses (food, utility bills, etc.). Your lender might also ask for information related to the property you want to purchase, including the type of dwelling and preferred postcode.

NAB will then verify all your information and check your credit score, and if the details stack up, you should be given a conditional approval certificate. This certificate stipulates how much money NAB is willing to lend you and is typically valid for 90 days. 

Once you have your conditional approval, you can start browsing for properties that you like and that fit within the budget that NAB has provided. After you find a suitable property, you’ll need to give a copy of the signed deed to NAB, following which you should get full approval and access to the funds. This process can take up to 4-6 weeks. 

Can I take a personal loan after a home loan?

Are you struggling to pay the deposit for your dream home? A personal loan can help you pay the deposit. The question that may arise in your mind is can I take a home loan after a personal loan, or can you take a personal loan at the same time as a home loan, as it is. The answer is that, yes, provided you can meet the general eligibility criteria for both a personal loan and a home loan, your application should be approved. Those eligibility criteria may include:

  • Higher-income to show repayment capability for both the loans
  • Clear credit history with no delays in bill payments or defaults on debts
  • Zero or minimal current outstanding debt
  • Some amount of savings
  • Proven rent history will be positively perceived by the lenders

A personal loan after or during a home loan may impact serviceability, however, as the numbers can seriously add up. Every loan you avail of increases your monthly installments and the amount you use to repay the personal loan will be considered to lower the money available for the repayment of your home loan.

As to whether you can get a personal loan after your home loan, the answer is a very likely "yes", though it does come with a caveat: as long as you can show sufficient income to repay both the loans on time, you should be able to get that personal loan approved. A personal loan can also help to improve your credit score showing financial discipline and responsibility, which may benefit you with more favorable terms for your home loan.