Attwood Marshall Lawyers Property and Commercial Special Counsel Barry van Heerden discusses the latest property market trends and the legal and financial obstacles real estate agents, buyers and sellers may be facing as we enter a new financial year.
Australia at risk of housing bubble burst
Whilst Australia is one of the world’s most at-risk nations of a housing bubble burst as we head into a time of financial uncertainty — with the situation looking worse than before the disastrous GFC hit, Australia’s economy has always proven to be strong and recoverable in a short period of time.
New analysis by Bloomberg Economics shows that 19 OECD (Organisation for Economic Cooperation and Development) countries have combined price-to-rent and home price-to-income ratios that are higher today than before the 2008 financial crisis — indicating that prices have moved out of line with fundamentals.
Among them, Australia is facing some of the biggest challenges, sitting at the fourth most risky property market in the developed world.
The analysis found Australia performed very poorly regarding key factors like price-to-rent ratio, price-to-income ratio and real price growth. It means that Australia’s housing market is one of the world’s bubbliest and is particularly vulnerable to falling prices.
Bloomberg stressed that while a lousy ranking doesn’t make a housing crisis a certainty, it is an “obvious vulnerability” as central banks raise interest rates and subsequently mortgage repayments increase.
With interest rates now rising, we have already seen property prices begin to plato and may shortly start falling
Property prices nationally fell by 0.1 per cent in May, the first monthly drop since September 2020. Doomed experts are warning they could fall by 20 per cent across Australia in the next 18 months. We do not believe this will be the case as the property market has always been resilient.
Market overview and RBA cash rate
As expected, the RBA decided to raise the cash rate at their June meeting. However, the 50 basis point hike was more significant than expected. The latest increase takes the cash rate to 0.85% which are still most probably the lowest in the world.
With inflation moving distinctly higher, the RBA’s increases on the cash rate still have some distance to go. Interest rates are expected to consistently rise throughout the second half of the year and into 2023. The RBA has indicated it will continue raising interest to bring the inflation rate down to an acceptable level.
While higher interest rates will reduce borrowing capacity, fewer household savings and tighter balance sheets will also impact serviceability assessments for prospective borrowers, adding to diminished demand for home purchases. For example, settled sales estimates from CoreLogic indicate dwelling sales over the three months to the end of May were 19% lower than at the same time one year ago. A similar trend is apparent in property lending data from the ABS, where the number of new mortgage commitments is also drifting lower.
While we expect the housing downturn discernible in Sydney and Melbourne will gradually spread to other regions, this trajectory will depend on how fast and high-interest rates move and standardise, along with the performance of the comprehensive Australian economy and labour market. A more robust economy, along with the tightest labour market conditions in a generation, should help ensure the ensuing housing downturn remains orderly.
Nationally, advertised stock levels remain 10.3% below levels seen this time last year and 28.4% below the previous five-year average. However, inventory in Melbourne and Sydney is now higher than a year ago and against the five-year average.
Outside of Melbourne and Sydney, stock levels are persistently below average, even more so in the cities where housing values are rising the quickest: Adelaide (-39.5%), Brisbane (-38.2%) and Perth (-34.7%) all have advertised stock much less than the five-year average.
While advertised stock levels provide insight into the market’s supply side, home sale volumes guide housing demand.
Sydney documented the largest drop in estimated home sales, down -33.4% in the three months leading into May compared to the same period in 2021. Canberra (-21.6%) and Melbourne (-21.3%) also recorded significant reductions in activity.
The cost to rent property continues to rise across most capital cities, escalating by 1.0% in May and 3.0% over the last quarter. The increase has been more notable in units than in houses.
Homeowners may take advantage of smaller banks’ competition to negotiate superior mortgage rates, despite the Reserve Bank raising the official interest rate twice this year.
Mike Gill of PEXA says the RBA increases have emanated more competition in the lending market, which means good opportunities for borrowers.
While the central banks passed on the total RBA cash rate hike to customers, many non-major lenders chose not to pass it on to remain competitive and win market share.
PEXA’s most recent Refinance Index shows that refinancing has increased in 2022 by 21.5%.
Interest rate increases may be front and centre for most borrowers, but the RBA says most households are fit to absorb increases despite higher costs of living.
Westpac agrees with the RBA that most of its customers can cope financially with the interest rate rises. The prediction is that most homeowners are around 48 months ahead with their mortgage repayments
With interest rates expected to return to a level of normality, the next one to two years will potentially see house prices in most Australian capital cities return to normal, arguably down from the highs generated by frenzied buyer activity throughout the COVID-19 pandemic.
Attwood Marshall Lawyers – giving buyers and sellers confidence as they embark on property transactions
Many buyers and sellers are looking to save money wherever they can when buying or selling property. However, cutting corners by not getting the right advice and assistance from an experienced property lawyer when buying or selling real estate can put homeowners in a vulnerable position, potentially costing them significant money and heartache down the track.
Our property lawyers enjoy working with real estate agents, house hunters and sellers to help them achieve their property goals and ensure transactions progress without any nasty surprises. We offer FREE pre-signing advice on all Queensland Contracts and are able to draft special conditions or negotiate between parties to protect everyone’s best interests and help property transactions proceed effortlessly.