Stories about the property market ‘do well’ online. What do I mean by that? Well, they get clicks. People want to read them.
Why? There are plenty of people who own a home, and plenty of people who would like to own a home, so the price of property, and any commentary around that, is going to be keenly watched by lots of people.
What’s starting to happen now is that the east coast property market is unravelling. It’s as a result of a combination of factors: elevated house prices to begin with; tighter bank lending; restrictions on property investors, and an over-supply of apartments.
“If you have no intention of moving anytime soon, or you’re still looking to get into the market, well, life could be about to get a little better.”
Prices in Sydney and Melbourne are in correction mode – so down very roughly across the board by 10 per cent. However there are forecasts that could turn into 15, or even 20 per cent falls from peak to trough.
Now, if you’ve just bought a home, and you’re on the edge of your mortgage repayments, let’s be honest, the housing market’s probably causing you a few headaches right now.
That said, if you have no intention of moving anytime soon, or you’re still looking to get into the market, well, life could be about to get a little better.
First home buyers
The first group of people to benefit from a house price crash is first home buyers.
Already, even with what many would describe as modest falls in Sydney and Melbourne, first home buyers are getting a real look into the market.
Commsec reports that the proportion of first-time buyers in the home loan market rose from 18.1 per cent per cent in October, to a 6-year high of 18.3 per cent in November (decade-average 17.7 per cent).
In November, according to the Bureau of Statistics, almost 10,500 first-home buyers took out a home loan, just off the highest number in almost nine years.
Commsec also reports that, as a proportion of all buyers, the share of first-home buyers is at 6-year highs.
Clearly, the further prices fall, the better-off first home buyers will be. What’s striking about these numbers though is that, with current falls, first home buyers are already materially better off.
If you discount recent price falls, in the Sydney market, on average, proper prices rose roughly 80 per cent over the past decade. So it’s possible there could be a sweet spot where first home buyers get a look-in, and those after a capital gain can still walk away from their investment with a sizeable profit.
Who am I kidding?
Prices could fall a lot further than they have already and many longer-term investors would be just fine. First home buyers, on the other hand, would be considerably better off.
The second group of people likely to benefit from a house price crash are singles and families who have no intention of moving anytime soon.
The only catch is that these folks need to be well on their way to paying off their mortgage.
The reason I say that is because if you’re on the edge of your mortgage, no matter how long you intend to stay in your home, you’re at risk of moving into negative equity (where the value of your property falls below the value of your loan – or put another way, the bank realises the collateral it has won’t pay for the loan, if you can’t pay for the loan). If you move into negative equity, well, then… let’s just hope that doesn’t happen.
However, if you’re not on the edge of your loan, you could find yourself having a little more cash this time next year.
“If you’re on the edge of your mortgage, no matter how long you intend to stay in your home, you’re at risk of moving into negative equity.”
Here’s the logic
If bank funding costs continue to fall, especially the funds they pool from what’s called the short-term wholesale money market (funds which then go into the money you receive when you apply for a home loan), the banks should cut interest rates.
Surely if their public relations departments are happy to role out the line that interest rates need to go up when funding costs rise, they’ll be just as happy to say interest rates can come down when costs fall. Right?
Most of the analysts I’ve spoken to on this subject see costs coming down. There is some cynicism about whether the banks will pass those cost savings on.
One thing we can say though is that there will be enormous social and political pressure to drop rates if the Reserve Bank also makes an official cut. That, say economists, depends on how hard the property market falls.
What comes around…
So really, if you think about it, if you’re not planning on moving, and the value of your house has already risen substantially of the past decade, you’ll likely welcome another big leg down in the property market.
It could even afford you a nice dinner out once a month for quite a while I suspect.
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