Australia’s house prices fall, interest rates rise but analysts say no crash yet

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According to Goldman Sachs, Australia's central bank could signal further tightening of monetary policy

Newly built homes in the Denham Court suburb of Sydney, Australia. Mortgage rates have fallen below 2% in recent years, but rates are rising rapidly in Australia.

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SYDNEY — In a country where property ownership dominates barbecue talks and dinner parties, Australian Lili Zhang is like many homeowners.

Despite having a healthy real estate portfolio, she now faces the biggest threat to her investment, which is rising interest rates.

Zhang, who is in her 40s and works in finance in Sydney, owns a A$3 million (nearly $2 million) home of her own and is investing in two other apartments in the city’s popular eastern suburbs.

To fund that, she has taken out around A$3 million (nearly $2 million) worth of bank loans.

Mortgage rates have fallen below 2% in recent years but, like many countries, rates are rising fast in Australia as the central bank tries to tame inflation, which was at a record high of 6.8% in the 12 months to August. lies.

The Reserve Bank of Australia has hiked interest rates for five straight months, raising the official interest rate to 2.35% from just 0.1% in April, according to Governor Philip Lowe, in a bid to remove the “scourge” of inflation.

Not the time to panic, but the feeling of not yet seeing the end of the tunnel with rising costs keeps me from sleeping through the night.

Lily Zhang

Australian homeowner

Banks have passed on increased borrowing costs through higher lending rates, which are now between 4% and 5% and will continue to rise.

Zhang said her repayments will soon double to about A$16,000 a month and she is concerned.

Her tenants have fixed leases, and she can’t raise rents to meet her new mortgage expenses. She also does not expect a reasonable salary increase.

“Not the time to panic, but the feeling of not seeing the end of the tunnel with rising costs keeps me from sleeping soundly at night,” Zhang said, adding that the central bank has been slow to respond to rising costs .

“I thought we had inflation last year, but we haven’t seen any moves to curb rising costs.”

Public auction of a house in Sydney’s Kyeemagh by the Bay suburb in September.

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“During the election [in May], everyone blamed war or lockdowns. It’s just a convenient excuse,” she added.

“We’re too late to tame inflation, I don’t need to be an economist to know … those bills when I’m checking out.” [supermarket] Counters are already telling me what to expect in the coming months.”

Zhang says she’s also cutting spending, including her favorite coffees to go, which is exactly what the RBA wants to see.

But while overall spending may be cut, cooling inflation, the Australian property sector is now entering a new phase of change, with buyers reluctant to buy due to high lending rates or waiting for prices to fall further. And sellers are not sure if they want to sell at a cheaper price.

In other words, the Australian property market is in the midst of a stalemate as it attempts to adjust to a new normal.

As property prices in Australia – which are among the highest in the world – fall, conditions in Australia will provide economic observers worldwide with insight as interest rates continue to rise.

Lisa Maree Williams | News from Getty Images | Getty Images

As property prices in Australia – which are among the highest in the world – fall, conditions in Australia will provide economic observers worldwide with insight as interest rates continue to rise.

According to the latest Demographia International Housing Affordability Report for 2022, Sydney was ranked second to Hong Kong as the world’s least affordable city. Melbourne is in fifth place.

“There’s definitely more standoffs between buyers and sellers right now,” said Elia Owen, head of housing research at Corelogic, one of Australia’s leading providers of property data.

“This is evident from the median market days, which stand at 33 days nationwide for the three months to August, versus a recent low of 20 days last spring.”

Real estate prices fall

According to Corelogic, national house prices have fallen for the fourth straight month as demand for homes begins to slow due to higher borrowing costs.

August’s monthly price decline was also the largest since 1983, Corelogic said in its latest Home Value Index report.

“Every capital city except Darwin is now in a housing downturn, with a similar scenario playing out in the rest of the state’s regions, where only regional South Australia saw property values ​​rise for the month,” Corelogic said.

Homebuyers gather ahead of the auction of a renovated terrace in Sydney’s Newtown in September.

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Australian economist Marcel Thieliant of Capital Economics commented on the latest Corelogic results: “The rapid deterioration in affordability due to rising mortgage rates will mean that prices in the eight capitals will fall by at least another 10%.”

In Sydney, Australia’s largest city, home prices have fallen more than 7% since prices fell earlier in the year just before interest rates were raised.

But the declines come after a massive price surge of nearly 30% in the post-Covid recovery that kicked off towards the end of 2020, fueled by stimulus-driven spending stimulus programs and helped by low interest rates.

There are clear signs that rising construction costs, a drop in consumer confidence and falling prices for established properties have resulted in a slowdown in demand for new homes…

Housing Industry Association

The same pattern is evident in Melbourne, the country’s second largest city. Since peaking earlier this year, Melbourne house prices have fallen nearly 5%.

According to Corelogic, current auction clearance rates in both cities closed between 50% and 60% lower in recent weeks despite the start of the spring season, the busiest trading period for the industry.

Since peaking earlier this year, Melbourne house prices have fallen nearly 5%.

Wilhelm West | AFP | Getty Images

Auctions are the most popular way of selling homes in Sydney, Melbourne and many parts of Australia, and are a key indicator of market sentiment in the property market.

This means that slightly more than half of the auctioned objects were sold. While they were still above 30% to 40% of evictions during the peak of the pandemic, they were lower than during the boom years of 2013 to 2017, when eviction rates were steady at around 70% to 80%.

More warning signs

Other indicators also point to the weakness of the Australian housing market, especially in large cities.

Australia’s national housing industry association, the Housing Industry Association, warned that housing construction had slowed.

“The fastest rise in cash prices in nearly 30 years will end this construction boom,” it said in a statement last month.

“There are clear signs that rising construction costs, a drop in consumer confidence and falling prices for established properties have led to a slowdown in demand for new homes from the record levels seen in 2020/21.”

Those that lend to developers and builders, like Australia-listed N1 Holdings, say they’re getting feedback that many buyers aren’t committing to purchases.

“Reduced borrowing capacity due to rate hikes has definitely pushed some buyers out of the market. It’s probably a transitional period when potential buyers refocus their minds on a new budget,” said N1 Holdings CEO Ren Hor Wong.

Housing Industry Association: “The fastest rise in the cash rate in almost 30 years will end this construction boom”

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The appetite for home loans has also fallen, according to the Australian Bureau of Statistics. They fell 8.5% in July after falling 4.4% in June.

According to mortgage broker Catalyst, there is a “significant drop in purchase inquiries with the first rounds of rate increases.” Lending levels have also been smaller and first-time homebuyers who have less credit standing have pulled out.

But requests for credit improved over the past month as borrowers began to accept higher interest rates and smaller loans, said Catalyst CEO Adrian Lee and Stephen Michaels, head of the mortgage and SME lending team.

No crash in sight

One of the clearest signs of a distressed real estate market is loan defaults.

In the latest update from Fitch Ratings, mortgage arrears of over 30 days fell in the second quarter of the year. The record low unemployment has put an upper limit on the arrears, it said.

However, Fitch pointed out that there was a three-month lag after interest rates rose and before a mortgage holder had to make higher repayments.

The rating agency expects the risk of default to continue to increase, particularly as Australian workers are fully employed but their wages will not rise accordingly.

“The magnitude of the pressure will also depend on the speed and magnitude of rate hikes and inflation,” it said.

Research group Roy Morgan said earlier this month that while about 20% of national mortgage holders were “at risk” of “mortgage stress” after the first three rate hikes, that was less than the number of stressed borrowers during the global financial crisis in early 2009 .

“The most likely scenario is that prices continue to fall until the middle of next year, albeit with a soft landing,” Lee and Michaels said.

Asked whether a “crash,” or a 30% peak-to-trough fall in house prices similar to the global financial crisis could happen in Australia, Owen said it was unlikely.

Mortgage profitability is fairly stable in Australia due to rising incomes and record-low unemployment, Owen said. Australian mortgage lending is also being prudent, including a 3 percentage point buffer for assessing mortgage fitness for purpose, she added.

Mortgage profitability is fairly resilient in Australia, due to rising incomes and record-low unemployment, and mortgage origination is also cautious, including a 3 percentage point buffer.

Lisa Maree Williams | News from Getty Images | Getty Images

However, as recessionary pressures mount amid higher interest rates, the tight labor market that is keeping mortgage repayments intact could begin to unwind.

“By the time rate hikes take full effect for mortgageholders, there will be even more pain for householders – just not enough to cause a housing market collapse,” Owen said.

Additionally, while a recession poses a risk to the Australian housing market, that risk is partially offset by high commodity prices, which are pushing the Australian dollar higher and relieving some of the pressure on the Reserve Bank to follow US interest rate hikes.

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