As 2022 draws to a close, it’s an opportunity to take stock of the year that was. The past year has certainly been an eventful one, with significant shifts in the property market and the lending environment.
Overview
Overall, the housing market remains active, although growth is stalling. Dwelling values remain 22.4% higher than the previous low in September 2020, despite a 4.8% fall from the peak in April 2022.
Our team have been guiding customers through structural shifts towards higher interest rates and cost of living pressures, which are unfamiliar territory for many borrowers. Despite falling property values, purchase prices remain high, and debt-to-income (DTI) ratios are still firmly in the spotlight for lenders and regulators alike.
While consumer spending remained relatively robust during the first half of the year, there are clear signs of households tightening their budgets, and this tightening is expected to continue with further rate increases and also the ‘fixed rate cliff’ due in 2023.
From now on, the Reserve Bank of Australia is likely to proceed much more cautiously as it assesses the impacts of rising rates on households and businesses and the shifting global economic environment.
Interest Rates
After more than a year of holding the cash rate steady at a record low 0.10%, in an attempt to steer the economy through the effects of the COVID-19 pandemic, the RBA raised it again in May of 2022, to tackle rising inflation.
The cash rate has risen every month since, and at its December 2022 meeting, the RBA board raised the cash rate by a further 25 basis points, to its current level of 3.10% – that’s a full 3% over the last 8 months.
The current cash rate takes us back to around where it was around 10 years ago, when the cash rate was 3.0% in December 2012.
With inflation still rising and the cash rate forecast unclear, some senior economists have offered predictions as to how high rates will go, with two of Australia’s big four banks warning it may go as high as 3.85% in mid-2023. From there, predictions are that rates will remain steady for the rest of the year, with a potential rate cut in 2024.
Inflation figures throughout the two-month period between December and February will likely determine whether the RBA persists in further rate rises throughout the first half of 2023, or decides to hold the cash rate steady, giving some relief to mortgage-payers.
Housing Market
After property values surged as a result of Covid-induced stimulus in monetary and fiscal policy in 2021, most markets are now moving into a downturn phase.
The current downswing in property prices is the fastest on record. Sydney is currently leading the decline, with dwelling values down 9.0% from January through to September. However, national home values remain 22.4% higher than September 2020 levels.
The national housing market decline could see a floor when the cash rate stabilises in 2023, although tailwinds, such as demand for rental properties, may already be stemming price falls.
Strong price gains over previous years mean that even double-digit declines in home values are unlikely to fully erode the gains made in home values through the recent upswing. The average hold period for a home in Australia is around nine years, so many sellers stand to make a nominal profit on the sale of their home, even if in the event of double-digit price falls.
Home Loans
Home loan lenders have been typically passing on the RBA rate increases in full, making the average variable rate mortgage significantly more expensive than it was at the start of 2022. We’re currently seeing the best variable owner-occupied rates, offering full offset functionality, sitting at around 4.79% pa. Although according to comparison website Mozo, the current industry average is actually around 5.44% pa.
The latest lending indicators from the Australian Bureau of Statistics (ABS) show that the average mortgage size (for owner-occupier dwellings) was $594,938 in October 2022.
While borrowing activity has slowed down in recent months as interest rate rises bite into demand, the average national loan size is still up a staggering 39% over the past five years according to the ABS. Out of all states and territories, new loans were largest in NSW at $737,478.
Clients who have been with us for 10 years or more, and have had their home loan or investment loans over that time, would be familiar with interest rates of around 5% pa or more, and have used the historically low interest rate environment to reduce their levels of debt. These clients have been typically making home loan repayments well above the minimum required, so are in a good position to absorb the climbing minimum repayments.
However, borrowers that have taken out loans more recently, during the record low-rate period, particularly those with a fixed home loan, or who have been making only minimum home loan repayments, should take action now to get themselves ready for rising rates.
Fixing hit record highs halfway through last year as borrowers took advantage of record low rates. However, many of these rates are coming to an end, with the peak of fixed home loans due to expire between July and December 2023.
Assuming a current home loan variable rate of 5%, and the worst-case predictions of further 0.75% increases to the cash rate next year, these mortgage holders may be looking at a variable rate of 5.75% after their fixed rate expires. Many of these are on fixed rates of 2.19% currently, so they may be facing an overnight rate increase of around 3.6%.
On a $1,000,000 home loan, that’s an extra $3,000 per month in interest costs.
For those clients trying to buy property, and potentially take advantage of some of the recent property price falls, they are going to find it tougher to borrow as much as they could have previously, when interest rates were lower.
Those with interest-only loans that are due to expire, may find they no longer qualify for an interest only loan and are unable to extend the interest only term, so will need to start making principal repayments.
Even if your budget can afford the repayments at the current best available home loan rate, the Australian Prudential Regulation Authority (APRA) requires that lenders assess a borrower’s ability to repay their loan with an additional interest rate buffer of 3.0%. Naturally, this will reduce the borrowing power of many borrowers who lenders will determine cannot afford a loan at a higher interest rate.
Top tips heading into 2023
For existing borrowers:
- Review your loans! Lenders are still competing for business, and if you haven’t reviewed or refinanced your variable home loan within the last 12 months, you’re probably paying too much. If your current lender is not willing to renegotiate your rate, it may be time to refinance. We can do the calculations, including all refinance costs, to determine if it’s in your best interest to switch.
- If you have a fixed rate loan due to expire in 2023, prepare early. We can work out a cashflow and repayment strategy to get you into the habit of paying extra on your home loan, so you are ready for when your minimum repayments increase. A few months prior to the fixed rate expiry, we will do a full loan review to ensure your new loan is structured correctly and at a competitive rate, and advise on your new repayment strategy.
For property purchasers:
- Knowing your borrowing capacity and having pre-approval is very helpful when it comes to the property search. It means that you can eliminate properties that are beyond your budget and spend more time finding a home that you can afford. Additionally, you’ll feel more comfortable bidding at auction, knowing what your ceiling is.
- Talk to us before your property search so we can do a full borrowing assessment and advise on your lending strategy, to ensure you can comfortably afford your new loan and will gain the lender’s approval, and also get your loan set up correctly, on the best rate, with the right repayment strategy, from the start.
To watch the Year in Review 2022 webinar with my fellow Directors Jeff and Marshall click here
Please reach out to us if you would like us to review your situation, including your existing loans or any proposed property purchase and to ensure your property and lending strategy is in line with your overall financial plan – contact kristi@evalesco.focusedgrowth-dev1.com.au
