- The owner-occupier residential mortgage rate will be 1.5% higher than the cash rate
- Slowing activity shows cash rate increases are succeeding in bringing inflation down.
- After rates, consumer confidence should stabilise the residential market in late 2023.
The sluggish property market is expected to last for a few more months with experts tipping the slowdown to continue until the Reserve Bank of Australia (RBA) stops hiking interest rates.
According to the latest Herron Todd White Month in Review, cost of living pressures and higher borrowing costs are starting to catch up with household budgets.
HTW, National Director, Group Risk and Compliance, Kevin Brogan said the confidence that existed in 2022 due to high household saving ratios has been eroded by increasing interest rates and inflation.
“Some market segments have shown resilience so far, but it is expected that most will succumb to these combined pressures,” Mr Brogan said.
Assessment rate surpassed
Mr Brogan said he is closely watching recent borrowers now, that mortgage rates have surpassed the assessment rate that was in place last year.
He said, “The reason this is so significant to the residential property market, is that an owner-occupier residential mortgage rate will be 1.5 per cent higher than the cash rate and APRA requires banks to include an additional three per cent serviceability buffer when assessing new loans.
“Property owners who may be struggling to meet higher mortgage repayments will only be able to refinance or purchase a new property if they can demonstrate that they can service mortgage repayments at about 7.75 per cent.
“An additional influence to watch is the large number of low-interest fixed-rate home loans set to expire in the first half of the year.
“If the borrower encounters a serviceability challenge when they refinance, this may cause more residential properties to come onto the market at a time of reduced demand,” Mr Brogan said.
Not all locations are negatively impacted
Despite slowing conditions, not all locations are being impacted in the same way, Mr Brogan said: “Overall, the signs of slowing activity and decreasing prices in the residential property market and of a slowing in construction cost escalation are indicators that cash rate increases are having some success in bringing inflation down,”
“Once inflation and consequently interest rates peak, greater certainty and consumer confidence should bring greater stability to the residential property market in the second half of the year” he said.
HTW said the Sydney median price declining by about 12 per cent in 2022, many economists are predicting a further fall of between five and eight per cent depending on the extent of any further interest rate increases.
They said if interest rates peak, we could see the bottom of the Sydney market around the third quarter of the year.
“The sense is that market participants are just looking to wait out the interest rate rises so they can invest with some certainty about what it will ultimately cost them,” HTW said.
HTW said that large-scale immigration into Melbourne will help prop up house prices and also boost rents.
HTW said, “The return of international students and the immigration surge predicted for 2023 will boost housing demand which will also result in an increase in rental properties.
“Rental values have risen rapidly and continue to show an upward trend in the CBD market at the beginning of this year, bullish for further rent increases in 2023 due to the higher level of housing demand” they said.
HTW said, “The past 12 months have been disappointing for property owners and sellers. The CoreLogic home value index to 31st January 2023 indicates a median price fall of 4.7 per cent for the year.”
“Of course, the same measure to the end of January 2022 reflected a 29.2 per cent gain, so we can’t complain too much.”
HTW said that the second half of the year will look more promising, led by interest rates reaching a ceiling, the return of immigration and a lack of new supply coming through.
HTW said, “It’s expected that the broader market will stabilise in 2023 as market participants navigate interest rate movements and demand and supply factors.”
“If the market does trend downwards, vendors and purchasers should have confidence that downward cycles have historically been marginal and short-lived. Market segments to watch in 2022 will be the inner ring, outer ring and vacant land markets.”
HTW said, “There is great underlying strength in the Western Australian property market despite this uncertainty, with the key driver being strong demand far outstripping chronic undersupply, resulting in a solid foundation for further growth in 2023.”
“As housing projects begin to come to completion in 2023 it will bring quite a few properties to the market which should result in an increase in sales activity.
“However a lack of new building contract signups will have a lingering impact, resulting in undersupply for several more years to come” they said.
HTW said, “Though we should not overlook the lingering concerns surrounding the residential market from 2022, the outlook for 2023 is not as glum as many might think, especially here in the Top End.”
“The Northern Territory’s counter cyclical economy looks set to continue as much of the residential market in other states feels the impact of interest rates more.
“A lagging supply pipeline will likely see rental stress remain as investors seek to get higher returns than most other states can deliver” said HTW.
HTW said, “The beginning of 2023 will more than likely continue the trends we saw at the end of 2022 with a decrease in housing prices, however, don’t expect the market to remain this way!”
“Desirable properties at the top end of the market will continue to see increases in prices due to market demand.
“Suburbs such as Deakin, Narrabundah, Griffith and others in the inner south are most likely going to see this increase” they said.
HTW said, “As interest rate increases continue to hit the hip pocket, it is predicted that once they stabilise, so too will the housing market. It’s just a matter of waiting to see when they stabilise.”
“A recent conversation with a real estate agent responsible for selling a new subdivision indicated that out of the 90 blocks that have been under contract, 36 purchasers have pulled out of the contract at the time of the issue of titles due to increased interest rates and escalated construction costs for a new build” they said.