Across the developed world, house prices are falling after years of strong growth. During the pandemic, house prices soared as people invested in their homes, wanting their houses during lockdowns to be as comfortable as possible. That trend now appears over. Rate rises and increasing mortgage costs have seen to that.
Unfortunately, Australia is facing perhaps one of the worst housing outlooks after experiencing one of the biggest booms. A mortgage binge fuelled by rock-bottom interest rates has left us with an enormous amount of household debt. As a share of disposable income, household debt sits at close to 200% in Australia – higher than our peers.
Excessive leverage makes people more vulnerable to job losses, interest-rate rises, and falling house prices. With central banks now raising rates at the fastest pace in 40 years, countries drowning in mortgage debt will be exposed to any economic slowdown.
In Australia, home prices have more than doubled since 2007, compared with rises of 50% in Britain and 60% in America. High levels of immigration have been a factor. In Australia, the population has grown by roughly a third during the last 15 years. APRA has tried to tighten lending standards and estimates that 22% of mortgages taken out recently put the holder in a potentially vulnerable financial position, based on a debt-to-income ratio of 6x or greater.
The RBA is on record as forecasting a 20% fall in house prices, which would be the biggest decline in four decades. A lot of the debt is indeed held by richer households that can afford it, but the story could quickly change if the economy dips into a material slowdown or recession.
We will probably start hearing more about “mortgage stress” – a term applied to housing-related spending (either mortgage or rent) that exceeds 30% of income. In some of our capital cities, many households already spend more than that share of income on housing repayments.
There’s also talk of an approaching “mortgage cliff” due to the structure of Australia’s mortgage market. Around 70% of loans outstanding in the Australian housing market are variable mortgages, meaning that repayments rise soon after the RBA adjusts the cash rate. The remaining 30% of loans are fixed, meaning the rate changes only when the loan term expires, with most fixed loans set for 2 to 3 years. The majority of the impact on fixed loans will occur from later this year, as around 880,000 fixed loans are set to expire within the next 12 months resetting to mortgage interest rates that are significantly higher. That could create a bit of a shock in the housing market.
Australian house prices across the country have already declined by 9% since their peak in mid-2022, although the figures vary widely from place to place. The RBA believes that just 0.5% of loans are currently in negative equity (where the mortgage exceeds the house’s value) and that this will rise to 1% if home prices fall another 10%. While these figures still seem quite low, the implications of households falling into negative equity are a potential brake on consumer confidence and consumer spending – which could create a spiral of negative consequences.
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