House prices have been expected to drop for months, but there are still no signs of this happening, and the latest figures show that wages have failed to keep pace with price rises. Tom Uhlich of Boss Money investigates .
If you’re currently in the process of looking for a home or have recently purchased one, you’re not alone in feeling stressed, confused and out of pocket.
As the Reserve Bank of Australia continues to keep interest rates at an all-time low, house prices across the country are continuing to rise. Paired with the scarcity of properties available on the market
and the delays in construction due to COVID-19, it’s no secret that people are currently paying too much for properties.
Let’s put it in retrospect. In the June 2020 quarter, 16% of borrowers were taking out loans amounting to at least six times their annual income. In the June 2021 quarter, this number has grown to 21.9% of borrowers.
But it’s not all bad news
Despite these record-high percentages, there has been a positive shift in APRA’s banking statistics. In fact, this year alone saw a fall in the share of loans with an LVR above 90% from 9.2% to 8.6%, meaning the number of loans to borrowers who have paid less than a 10% deposit has declined.
The share of interest-only loans also fell from 18.2% to 17.4%, indicating that more borrowers have been paying down their mortgage from day one. The share of non-performing mortgages on lenders’ books also declined from 1.1% of all loans to 1.0%.
So, when will the cash rate rise?
Leading Commonwealth Bank economist Gareth Aird has said he expects the RBA to start increasing the cash rate as of November 2022. He suspects that by Q3 of 2023 it will have risen back to 1.25%.
However, Australia’s housing-related debt is currently so high that this increase to 1.25% will elevate all interest payments to 5% of disposable income. In regions where lockdowns have been tight, mortgage stress has quickly followed, and research has revealed that 89% of homeowners in these areas are paying for mortgages they can’t afford.
The forecast 1.25% interest rate for 2023 is very low compared to previous periods. But with household debt at an incredible high, the rate rise could considerably impact borrowers’ capacity to service this debt.
But there is a positive. As CBA senior economist Belinda Allen has revealed, household interest rate payments are currently almost at a record low of 3.5% due to the low RBA interest rates. This demonstrates that although some may be doing it tough, the figure is much lower than the 8.5% interest that homeowners were paying during the 2008 GFC.
The RBA’s ability to prevent the economy from getting out of hand has protected many homeowners during these difficult times and helped them manage their debts. For example, a mortgage of $500,000 that is fixed for two years at 1.8% would see repayments increase by $500–$660 per month at the end of two years (assuming a 1% rise in rate). Therefore, a decrease in the cash rate has lowered these repayments and allowed borrowers to take better control over their financial commitments.
Then where is the trouble?
The major issue will arise for those who have only paid a 5% deposit on their home as they have had to rely on financial support from the bank or a family member. While loans have grown by over 15% in the past few years, incomes have remained stagnant. In many cases, incomes have even decreased due to job losses or reduced working hours.
Compared to borrowers in NSW, where two in five are already experiencing mortgage stress due to spending more on their mortgage payments than they are earning, Queenslanders are considered well off. If rates in NSW rose by as little as 1%, people could lose their homes, as those with smaller deposits would see large increases in their repayments.
Business analysts have pointed out that mortgage stress is not apparent across Australia as struggling homeowners have been encouraged to sell before being faced with irreversible debt.
Contact Boss Money on 0476 111 000 or [email protected].