Recently, Australia saw the largest one-month jump in home values in the past 17 years. In Sydney, house values rose 3.6% from the last quarter. House values in Melbourne also rose 3.5% from the previous quarter. These events plus a surge in new home loan applications may make the RBA (the Reserve Bank of Australia) increase their record-low interest rates. This was not necessarily expected so soon, and some economists are predicting rates could rise as early as next year.
This change prompts the question: What will this mean for homebuyers?
The climbing prices of homes are rapid. Over the past three moments, the median price for a house in Sydney reached more than $1.06 million, which is a nearly 5% rise over the past quarter. Over the same time period in Melbourne, the price climbed 4.2% to $829,509. Over the whole country, prices rose by 2.1% in February, partly due to government-sponsored support programs for homebuyers but also buoyed by other factors such as post-Covid buying confidence.
Separate figures from the Australian Bureau of Statistics (ABS) showed that buyers are prepared to take on more debt for a chance at owning property. This is reflected in a 10.5% jump in home loan commitments in January — a 44.3% jump from January 2020.
In Western Australia loans are up 110%, in Queensland they’re up 74%, and in Victoria, they’re up 44%. (Note that these numbers exclude refinancing loans.) Sydney home prices are expected to rise an additional 5.9% in 2021 and 4.5% in 2022. For Melbourne, the prediction is 4.5% and 5% respectively.
It’s all fueling discussions of a potential housing boom, with Westpac economists predicting a 20% rise in major cities over the next two years. It’s going to make it more difficult for people with lower incomes to enter the market.
First-home buyer loans rose significantly over the past year. More than half in Western Australia were first-time buyers in January and nearly the same percentage were first-time buyers in Victoria. The value of home loan commitments for new owner-occupiers reached $19.9 billion in December 2020, nearly 39% higher than the same month in 2019.
The generous programs from the state and federal governments, plus rock-bottom interest rates, are seen as the cause of these numbers, especially now that the threat of the pandemic has largely passed. In addition, job ads rose by 7.2% in February after a 2.6% hike in January in a sign that the economy is making a strong recovery. Overall, job ads are at their highest levels since October 2018.
You’re essentially dealing with multiple factors on all sides. First-time home buyers, property values, and mortgage demand are all reaching notable (if not record) highs. This is not entirely unlike what we saw after the global financial crisis. All the economic incentives and low-interest rates are ultimately an invitation to take a chance on buying residential property.
Owner-occupiers are increasingly battling with investors who are now called to the market, as investment property loans have now gone up 9.4%. It’s something to keep in mind for buyers during their home search, but it’s also a factor that the RBA needs to consider when deciding what to do about the interest rates.
The RBA has a difficult job ahead of them, as they have to balance out homebuyer needs with the needs of the general economy. When the prices of property could potentially climb another 10%, officials have to consider what they can do to keep the economy in check. Increasing interest rates will certainly price some people out of the market, but so will unlimited property prices.
Of course, you can see why this would be unsettling news for some people. Originally, the bank had said that they weren’t likely to raise official rates above 0.1% before 2024. So the possibility of a rise by the beginning of next year is not something that everyone was prepared for. Thankfully, there are some indications that the effects of this might not be severe.
There’s no telling what will happen in the future, but historical numbers do give us some indication. Sydney property growth is concerning to the RBA on multiple levels, and rightfully so. However, the actual growth in housing debt has been relatively tempered by the country’s current lending standards.
Even if the RBA raises the interest rates, they’re unlikely to be drastic hikes. Bill Evans, the Westpac Chief Economist, stated that the RBA will be there to encourage new homebuyers for at least the next few years. Introducing a soft landing for markets may help to avoid severe plummets as seen in the late 2010s.
As with most economic propositions though, this is a trade-off. With lower interest rates come higher housing prices, which can potentially make owning a home more challenging than if the interest rates were higher.
Getting better advice can make a huge difference when it comes to making smarter decisions. Shore Financial has mortgage brokers who understand the Sydney property market inside and out. We’re here to give you advice that’s based on the facts. There’s no telling what the RBA will do, but we can make reasonable predictions that prepare for inevitable changes.
Call us today to speak to a mortgage broker and get one step closer to buying a property.