Australians have enjoyed low home loan rates for years. But, this is about to change say economists. According to data, the Reserve Bank intends to move rates up. But, home loan trends hinge on more – home prices, construction levels and market stability – because the housing sector is vital to the Australian economy. Let’s take a look at some of these home loan trends for 2018.
Housing is an asset, one most influential in terms of household wealth. Plus, it has a unique dual role as an investment and consumption stimulant. Australian housing also secures most mortgages and small business loans. So, dwellings are collateral and an integral part of the finance sector’s balance sheet. Therefore, changes in housing prices affect what home owners buy, personal and business investment levels, and financial stability.
At present, the Australian Bureau of Statistics estimates the housing market consists of 9 million homes. Typically, every month around 20,000 new dwellings receive approval. The total value of mortgages written in July 2017 was $20.2 billion, this amount increased to $22.1 billion in August. On average, the size of the typical Australian mortgage is $369,600.
So, how do home loan trends effect this market? Let’s find out now.
According to economists, Australian interest rates are likely to go up over the next 2-years and return to 7% levels. If this is the case, then the Reserve will increase the cash rate from 1.5% to around 3.5% – that’s eight 0.25 basis point rises over the next 24-months.
Now while this sounds daunting, economists also suggest these rate rises will be strategic and closely watched. They also propose the Reserve Bank moves will start out quarterly, with economic impact recorded before making another move.
Factors that will influence the Reserve include economic strength, weakening household spending, increased Australian dollar value, and decreasing employment growth. If these factors present themselves, then rate rises could stall until the economy stabilises.
With Australia now having elevated levels of household debt, economists say home owners need to prepare themselves now for rate rises. For instance, a rate rise of 2% will add an extra $490 to the monthly repayment of an average $371,000 mortgage. This increase may be a struggle for already financially stretched households to meet.
At present, the average mortgage is around 5.61%. Therefore, a rate rise of 2% could push this rate up to 7.61%, which based on the average home loan could add an extra $176,702 to the mortgage.
However, home owners can combat rate rise, by considering their options now. For instance, if you’re concerned about making mortgage repayments, then:
- Start looking at your budget and finding ways to save more.
- Pay more off your mortgage now while rates are low, so you can reduce your principal, which, in turn, decreases your interest.
- Consider refinancing, fixing interest, or even downsizing.
- Look at using home loan features such as an offset account, which helps to reduce your interest repayments.
Property prices across Australia will remain stable over the next year. However, a rising supply of new dwellings and dwindling investor demand as interest rates rise, will result in lower property prices.
Having said this though, housing prices across Australia have skyrocketed over the last 10-years. The main reasons being mining investment, extremely low interest rates, and increased investor demand. As a result, housing affordability has declined.
The graph below shows that out of the Australian capital cities Sydney and Melbourne are the most unaffordable when comparing home prices to income.
The affordability of major Australian cities over the past 34 years.
Source: Demographia 25th Jan 2016.
While Sydney’s undersupply of housing and low interest rates kept owner-occupier home loan activity high, the loss of investors in the market resulted in a demand drop. As a result, home prices in Sydney have fallen. In June 2016, medians were $1,055,000. However, according to CoreLogic, the median value of Sydney homes in October 2017 is $905,917. Looking at monthly and quarterly data, dwelling values were down by 0.5% for the month and down by 0.6% for the quarter. Though, Sydney recorded a price rise of 7.7% for the year. This trend will continue throughout 2018.
In June 2016, the Melbourne median was $765,000. In October 2017, this average is $710,000 according to CoreLogic. Melbourne dwelling values increased by 0.5% in October and by 1.9% for the quarter. Annual rises reached 11.0%. Forecasts expect the Melbourne market to continue to slow during 2018, though to a lesser degree than Sydney.
Based on national data, it’s likely that the number of home loans for owner-occupiers and investors will decline, as will the value of these loans. With predictions that interest rates will rise, mortgage demand may shift from variable to fixed home loans and more home owners may seek to refinance.
With a shortage of dwellings across the nation, Australia entered an apartment building phase. One of the biggest in the nation’s history. This boom is ending as ABS data shows that construction has peaked. In fact, over the last quarter a 2.4% fall in construction work occurred, with new residential building sliding by 4.4% and renovations dropping by 5.1%.
Given the Australian cash rate is at a record low and the Reserve Bank is indicating they will start increasing this, it is highly unlikely construction will boom again. Thus, it’s expected new dwelling investment will continue to fall back to normalised levels late in 2018 and into 2019.
The most significant decider on how much new dwelling investment rolls back will be the Reserve. If they raise rates too early by too much, then this will turn a standard market correction into a slump. Although, the nation’s high population growth and stable employment should ward off any price slump.
In April 2017, around 220,000 dwellings were under construction in Australia, according to ABS data. These figures will fall to 160,200 by 2019 based on forecasts by economists.
With investors fuelling the current apartment boom, changes in the level of construction may be even higher. Why? Well firstly, lenders divided investment and owner-occupier loans charging a higher interest for investment loans. Secondly, they increased interest-only loan interest as well. Thirdly, overseas investors are now paying higher taxes and interest rates. These factors, along with the news that the Reserve will look to increase the official cash rate, will reduce further investor spending.
With major city home prices declining there is talk of a housing market crash, where the bottom falls out of the market and the equity that many Australians rely on subsides. Now if you look at CoreLogic data, the fall in Sydney housing values could fool you into believing that the market is crashing.
However, to put this into context, we need to look back. Over the last five years, Sydney property values rose by an estimated 75% in value. This figure equates to a growth of $521,000. Also, over the last 12-months Sydney prices increased by 13%. This price increase took this city’s median value to $909,914.
In comparison to Sydney, Melbourne’s annual median is around $695,500 according to CoreLogic. Prices in this city are also taking longer to ease. Although, rental yields are at 2.9%, the lowest in three months to August.
Considered as Australia’s two largest housing markets, Sydney and Melbourne are moving through cycle peaks. A peak typically marks the top of the cycle, then the market will enter a correction phase. Often people confuse this stage of the cycle with a crash. But, it is just an extended slow period where prices drop and stagnate.
With the housing market cycling every 7 to 10 years, it’s likely that the correction phase will hover over 2018. This cycle coupled with Australian wage growth also stagnating and the introduction of rate rises will keep the correction phase lingering for longer.