Australian house prices fall, interest rates rise but analysts say no collapse yet

Newly built houses at Denham Court outside 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 real estate ownership predominates in barbecue conversations and dinner partiesAustralian Lili Zhang is like many homeowners.

While she has a healthy asset portfolio, she now faces the biggest threat to her investment, rising interest rates.

Zhang, aged 40 and working in finance in Sydney, owns a AU$3 million (nearly $2 million) home of his own and has invested in two other apartments in the popular eastern suburbs. city ​​language.

To finance, she took out a bank loan of about AU$3 million (nearly US$2 million).

Mortgage rates have fallen below 2% in recent years, but like many countries, rates are rising rapidly in Australia as the central bank seeks to rein in inflation. at a record high of 6.8% in the 12 months to August.

The Reserve Bank of Australia has interest rates increase for five consecutive months nurture official cash rate to 2.35% from just 0.1% in April in an effort to eliminate the “scourge” of inflation, according to governor Philip Lowe.

Not the time to panic, but the feeling of not seeing the end of the tunnel with the added cost kept me from sleeping for many nights.

Lili Zhang

Host Australia

Banks have approved increasing borrowing costs through higher lending rates, which currently range from 4% to 5% and are on track to increase further.

Zhang said her repayments would soon double to around AU$16,000 a month and she was worried.

Her tenants are on fixed leases and she can’t raise her rent to cover her new mortgages. Nor does she expect a commensurate pay rise.

“This is not the time to panic, but the feeling of not seeing the light at the end of the tunnel of rising costs is keeping me from sleeping at night,” Zhang said, adding that the central bank had slow response to rising costs.

“I think we had inflation last year, but we don’t see any steps to limit rising costs.”

Public auction of a home in the Sydney Bay suburb of Kyeemagh in September.

Su-Lin Tan | CNBC Asia

“In the election [in May], everyone blamed the war or the strikes. It was just a convenient excuse,” she added.

“We’re too late to tame inflation, I don’t have to be an economist to know… those bills when I checked at [supermarket] the counter told me what to expect in the coming months. ”

Zhang said she also cuts costs, including on her favorite takeaways, which is exactly what the RBA wants to see.

But while overall spending could be cut, thus lowering inflation, Australia’s housing sector is now entering a new state of flux where buyers are reluctant to buy due to high loan rates or They are waiting for the price to drop further. And the seller is unlikely to want to sell at a cheaper price.

In other words, the Australian housing market is having a hard time trying to adjust to the new normal.

With house prices in Australia – one of the highest in the world – falling, conditions in Australia will provide some insight to economic watchers globally as interest rates continue to rise.

Lisa Maree Williams | Getty Images News | beautiful pictures

With house prices in Australia – one of the highest in the world – falling, conditions in Australia will provide some insight to economic watchers globally as interest rates continue to rise.

According to the latest Demographia international housing affordability report for 2022Sydney ranks second after Hong Kong as the most affordable city globally. Melbourne is in fifth place.

Elia Owen, head of residential research at Corelogic, one of Australia’s leading property data providers, said: “There’s certainly a lot of disagreement between buyers and sellers at the moment..

“This can be seen in the average number of days in the market, which stood at 33 days nationally in the three months to August, up from a recent low of 20 days last spring.”

House prices fall

Home prices across the country fell for a fourth straight month as demand began to fall due to higher borrowing costs, according to Corelogic..

The monthly discount in August was also the biggest since 1983, Corelogic said in its most recent Home Value Index Report.

“Every capital city except Darwin is in a housing downturn, with a similar scenario playing out in the rest of the state, where only South Australia has recorded it,” Corelogic said. the increase in house value during the month”.

Homebuyers gather outside the auction of a refurbished terrace in Sydney’s Newtown in September.

Su-Lin Tan / CNBC Asia Pacific

Commenting on the latest Corelogic results, Australian economist Marcel Thieliant of Capital Economics said that “a rapid decline in affordability due to rising mortgage rates will result in prices in the eight capital cities falling by at least another 10 percent.”

In Sydney, Australia’s largest city, house prices have fallen more than 7% since house prices started falling at the start of the year, just before interest rates were raised.

But the drop follows a massive nearly 30% rally in the post-Covid recovery that began in late 2020, fueled by stimulus programs to boost spending and supported by low interest rates.

There are clear signs that rising construction costs, falling consumer confidence and cheap housing prices have slowed demand for new homes…

Housing Industry Association

The same pattern can be seen in Melbourne, the country’s second largest city. Since hitting a peak earlier this year, house prices in Melbourne have fallen by almost 5%.

According to CorelogicCurrent clearance rates at auctions in both cities have also closed between 50% and 60% lower in recent weeks, though spring has come, the busiest trading period. of the industry.

Since hitting a peak earlier this year, house prices in Melbourne have fallen by almost 5%.

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

This means that just over half of the properties put up for auction have been sold. While still 30% to 40% above clearance during the peak of the pandemic, they are lower than during the boom years from 2013 to 2017, when clearance rates were consistently at around 70% to 80%.

Other warning signs

Housing Industry Association: “Fastest growing cash rate in nearly 30 years will bring this building boom to an end”

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

According to mortgage broker Catalyst, there is a “distinct decline in the buying inquiry with the first rate hikes.” Loan sizes were also smaller and first-time homebuyers, who were less able to borrow, withdrew.

But requirements for loans have improved over the past month, as borrowers start accepting higher interest rates and smaller loans, said Catalyst CEO Adrian Lee and head of the lending group. home and SME mortgage loans Stephen Michaels said.

No accidents in sight

One of the most noticeable signs of a troubled real estate market is a pile of debt.

In the latest Fitch Ratings update, “mortgage over 30 days” fell in the second quarter of the year. The record-low unemployment rate has set a ceiling on delinquency, it said.

However, Fitch points out that there is a three-month lag period after interest rates rise and before a mortgageholder needs to start paying off higher debt.

The ratings agency expects the risk of breaking the law to continue to increase, especially since Australian workers, while fully employed, will not see their wages rise accordingly.

“The extent of the pressure will also depend on the speed and extent of interest rate increases and inflation,” it said.

Goldman Sachs says Australia's central bank could signal further tightening of monetary policy

Earlier this month, research group Roy Morgan said that while around 20% of the nation’s mortgage holders are “at risk” of “mortgage stress” following the first three rate hikes, the number of Borrowing that was stressed during the Global Financial Crisis was less. 2009.

“The most likely scenario is that prices will continue to fall through the middle of next year despite a slight landing,” Lee and Michaels said.

Asked if a “collapse” or 30% peak-to-trough drop in house prices similar to the global financial crisis in Australia was possible, Owen said it was unlikely.

Owen said mortgage service prospects were fairly stable in Australia due to rising incomes and record low unemployment. She added that mortgage lending in Australia is also very conservative, including 3 percentage points to assess the serviceability of the mortgage.

Mortgage availability is fairly stable in Australia due to rising incomes and record low unemployment and mortgage lending is also very conservative including a 3 percentage point buffer.

Lisa Maree Williams | Getty Images News | beautiful pictures

However, as recessionary pressures mount against higher interest rates, a tight labor market that keeps mortgage payments in place could begin to unravel.

“By the time the cash rate hike has its full effect on mortgage holders, there will be some extra pain for households – just not enough to lead to a market crash,” said Owen. House”.

Additionally, while a recession is a risk to the Australian housing market, this risk is partially offset by high commodity prices that keep the Australian dollar afloat and ease some pressure on the Bank. Reserve in raising US interest rates.

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