There is an endless number of doomsday articles of late, exclaiming an imminent Australian property crash. The theme is usually one of the following; a tidal wave of fixed-rate mortgages about to roll onto a variable rate, banks tightening lending standards, migration about to collapse, or a construction frenzy about to cause oversupply.
Frankly, we don’t need a special event to drive down property prices, the catalyst is already in the system - rising interest rates.
Your house is worth what someone else is both willing and able to pay for it.
Let’s discuss briefly on the able side of the equation. I’d rather be simplistically wrong than complicatedly wrong so all numbers are estimates.
You achieved the Australian dream and bought a house in Sept 2019, for the national median of $773,635 with a 3% interest-only mortgage rate. Assuming a 20% deposit this was costing you $18,567p.a. to service the mortgage. Now fast forward 2 years and let’s run through the same scenario. In Sept 2021 you bought a house for the national median of $994,579, again with a 20% deposit, but now a lower 2% interest-only mortgage rate. Despite property prices increasing and hence your mortgage increasing by 28% than if you bought 2 years earlier, your mortgage now costs you less to service - $15,913p.a. (Winning). Now let’s look at today (late 22 figures) only 1 year on from the above scenario. You bought a house for the national median of $1,022,194 with a 5.5% interest-only mortgage rate. All else being equal your mortgage now costs you $44,976 p.a. (Ouch!) - that’s 2.4x more than last year! Given the latest ABS data, median household income is $72,221 (after applying a simple tax calculation) that’s a big portion (62%) of your income being used to service your mortgage, if you bought at today’s high rate, high property price environment.
It’s evident that today’s rates are going to have an impact on what someone is able to pay, and it already is. So when will the house market crash and my once-in-a-lifetime opportunity present itself? Not so fast…
House prices are quick to move up and slow to come down.
There are generally two types of sellers: people who must sell their houses (moving to a new city, lost a job, got divorced) and those who would like to sell their houses (bored with their old four walls, need a bigger or smaller house, would like their kids to go to better schools etc.).
Initially, only those who must sell their houses will have to accept lower prices. A price that is impacted not just by a seller’s willingness to accept a lower price (supply) but also by a prospective buyer’s ability to borrow (demand).
However, as time goes by, selling becomes less and less discretionary as a desire to sell turns into a need. As more and more selling occurs the number of prospective buyers able to borrow also becomes less and less.
What someone is willing to pay is more psychological, however you’ll see a strong correlation between the two. When fewer people are able to pay for a home, those that are able will be less willing .
Housing prices in Australia's capital cities have fallen by more than 9% since May 2022. Sydney has seen the biggest decline, with home values falling by more than 13%, while Brisbane has experienced a 9.7% decline and Melbourne has seen an 8.5% correction. Continuing this momentum, Australian house prices are expected to experience their worst cumulative peak-to-trough loss by the first half of 2023.
Fear-mongering articles about black swan events are hard to predict and even harder to quantify, so don't waste your time. When rising interest rates are the driver, the housing market will head in the same direction as other more immediately priced assets (e.g. Equities & Bonds).
For those hoping to buy the housing dip, even if we assume a 25% house price trim off the recent national median, it’s still going to cost you twice as much to service your mortgage as it did in 2021. That’s assuming your ability to borrow remains intact.
Future property investors need to focus on their ability to borrow, as the days of ultra-low interest rates are in the rearview.
