The average household in a raft of suburbs around Australia will be pushed into mortgage stress if interest rates climb just 1 per cent. That was a headline doing the rounds over the weekend.
Only a few weeks earlier, modelling by one of Australia’s most publicised property pessimists - who unfortunately keeps getting his predictions very wrong, yet they keep getting headlines in the financial press - suggested a minimum mortgage rate hike combined with a higher buffer rate - as required by the recent APRA edicts to the banks - would send thousands of residential landlords into financial stress and could fuel house price falls by the end of next year.
Also read: Are we in for a pre-election economic boom?
So, will higher inflation lead to higher interest rates that will tip the scales and spell the end of the current property boom?
That’s one of the questions I ask Dr Andrew Wilson, Australia’s leading housing market economist and chief economist of My Housing Market, in this week’s Property Insiders chat.
I also seek his insight into what’s happening with employment, considering our unemployment rate shot up last month.
It seems the story about rising interest rates just won’t go away, and even though we’ve discussed it over the past few weeks in these regular Property Insider chats we really must address the speculation that this could lead to mortgage stress, not only for homeowners but for property investors.
And more even more importantly, we need to address the concern many will have after watching the nightly news or reading the papers and being told the value of their home could plummet 15-20 per cent.
Now, we know falling interest rates increase borrowing capacity, which fuels housing price growth.
And while the opposite - rising interest rates - decreases borrowers’ capacity, that doesn’t necessarily mean the value of houses in Australian suburbs will slump.
What is mortgage stress?
There are various definitions of what mortgage stress is, but it’s most commonly defined as a household spending more than 30 per cent of their pre-tax income on their home loan repayments.
The underlying premise is that at these levels of debt, the average homebuyer will be struggling to repay their loan.
Around Australia, house prices are up more than 20 per cent over the past year, but that’s an average. In some suburbs, properties have increased 30 to 40 per cent over the past two years.
While the current property boom has been favourable to those already in the property market, the rise in property values has been considerably more than the minimal rise in incomes. That means would-be buyers are either frozen out of homeownership or have to pay a significant portion of their income to service a home loan.
Those commentators concerned about mortgage stress remind us that last year the governments, banks and financial institutions gave various support packages to reduce the risk of mortgage defaults, but these have now, in general, been removed.
Yet looking at mortgage defaults or mortgage arrears with our banks would suggest very few Australian households are currently suffering mortgage stress, and many are well ahead in mortgage payments.
And we know that the banks have been only lending money to those who could comfortably handle a 2.5 per cent increase in the mortgage rate and, as of the beginning of this month, this buffer has been increased to 3 per cent.
The only reason the RBA would raise interest rates would be to slow a booming economy at a time when inflation would be high and wages would have increased considerably.
Of course, rising wages would in general mean property owners would have less risk of mortgage stress.
Let’s look at what could cause a housing market crash
There is no doubt that at some time in the future we will experience a cyclical property market correction, but there is no need to worry about a house price “collapse” like some property pessimists are suggesting.
House prices collapse when people are forced to sell their homes and there is no-one willing to buy them.
I accept that properties are expensive at present– but that doesn’t mean property values will crash.
In fact, they’ve never crashed since housing market data has been collected in Australia.
Instead, what tends to happen is an orderly correction, with prices only falling slightly, because homeowners choose to simply remain in their home and ride things out, while most property investors also try and hold on rather than realising their capital loss.
On the other hand, a true “collapse” in house prices would require a significant external shock such as:
Unemployment high enough to trigger a wave of forced home sales - that’s not going to happen
Interest rates rising so high, that a raft of homeowners are forced to default on their mortgages - the RBA wants this about as much as it wants another strain of coronavirus
A credit squeeze – APRA is currently making it a little bit more difficult to borrow money, but they don’t want to crash our property market either
A severe recession, which would increase unemployment and cause homeowners to default – that’s not on the cards.
A severe oversupply of property – currently we have an undersupply of the right type of properties that most homeowners want
So, while a crash is not on the cards, a correction will occur one day and, at that time, some properties will hold value better than others.
Obviously, that’s the type of property you should own – A-grade homes or investment-grade properties in established suburbs and lifestyle locations.
Last week, Treasurer Josh Frydenberg admitted the latest job figures confirmed “lockdowns cost jobs”.
Employment fell by 46,300 in October as the number of part-time jobs fell by 5,900 with full-time jobs down by 40,400.
At the same time, the participation rate rose from a 15-month low of 64.5 per cent to 64.7 per cent.
This resulted in the unemployment rate rising from 4.6 per cent to a six-month high of 5.2 per cent.
Hours worked fell by 0.1 per cent to 1,729 million, to be down 0.4 per cent on a year ago.
The underemployment rate lifted from 9.2 per cent to a 12-month high of 9.5 per cent.
But the Australian labour market has begun healing in November after prolonged Delta-virus-induced lockdowns in Australia’s south-east contributed to the cumulative loss of 333,700 jobs between August and October.
In recent weeks, policymakers pivoted from ‘zero-COVID’ strategies to ‘living with COVID’ as vaccination rates hit the required 80 per cent thresholds, enabling greater mobility as social distancing measures were eased.
Leading indicators of labour demand rebounded sharply since mid-October as employers positioned their businesses for reopening. The number of new job ads on seek rose 10.2 per cent in October, following a strong 8.8 per cent rise in September, which points to the unemployment rate resuming its downward trend.
Another weekend of strong auction results
IN this week’s Property Insider video, we discuss how most cities continue to record generally strong results for sellers.
Auction clearance rates typically ease over the concluding period of the spring selling season, driven down by higher listings.
Buyers are still out there but, with more choice, agents are reporting fewer buyers interested in each property and fewer bidders registered for each auction.
And this past weekend, with more properties coming on to the market for sale, auction clearance rates were down, but still strong in Sydney and Melbourne.
Steady Sydney still strong for most sellers
The Sydney auction market steadied at the weekend, but clearance rates eased from the boomtime results recorded over previous months.
Sydney recorded a clearance rate of 77.8 per cent, which was similar to the previous week's 76.1 per cent but again lower than the 78.4 per cent of recorded over the same weekend last year.
High listing numbers are affecting results, offering more choice for buyers and more competition for sellers.
Melbourne rebounds despite listings surge
The Melbourne weekend auction market bounced back on the Saturday following the previous weekend's two-month low result.
Melbourne reported a clearance rate of 77.7 per cent on Saturday, which was higher than the previous weekend’s 76.5 per cent and also higher than the 73.8 per cent recorded over the same weekend last year.
The high clearance rate was reported despite a surge in listings, with 1,206 homes up for auction at the weekend.