The property market has experienced turbulence in 2022. The interest rates are at a record high. Home prices have fallen to new lows. CoreLogic’s Best of the Best annual report states that the decline in Australia’s housing market performance for 2022 is due to successive interest rate increases, rising inflation, poor consumer confidence, and deteriorating affordability.
Reserve Bank of Australia is expected to continue raising cash rates until it brings down the persistently high inflation. The central bank is argued to have already entered dangerous territory, which could lead the economy into a recession. We provide an overview of the real estate market in 2022 and what to expect in 2023.
2022 Cash Rate Hikes
This chart shows the progression of cash rate increases this year, starting with the first increase in May.
Repayments On Rise
Borrowers are struggling to make their mortgage payments and have faced increased mortgage repayments. For some, stress is due to mortgages.
Take a look at the monthly repayments of borrowers after successive increases in cash rates. This chart compares the monthly repayments made before and after the first rate increase in May. These example loan repayments are based on our repayment tool and the lowest variable rate that we offer for 30 years as of December 20,22. Rates may change after this date.
As interest rates have increased, people are looking to refinance their home loans at a lower interest rate. According to the latest Australian Bureau Of Statistics figures, external refinancing reached a record of $18.1 billion by June 2022. Since June, the monthly owner-occupier mortgage refinancing has been above $12 billion. This is well above values before the pandemic. Investors have also refinanced at high levels.
In response to this increase, lenders are offering lower interest rates, faster approvals, or cashback to existing customers.
See how we helped one of our clients who was concerned about interest rate increases refinance with us. They saved a lot of money.
Arthur, 38, is a bachelor who works in the medical field. He lives with his parents. He has worked full-time for this job for 11 years, three months. His gross annual income is $200,000.
Arthur bought a $1.2 million investment property with a mortgage worth almost $1 million. He is paying 6.59% interest per year. He was worried about the rising interest rates and struggled to make his monthly payments. He wants to refinance the loan he has and reduce his interest and fees. He tried to find mortgage brokers that could help him achieve his goals and understand his situation.
He found Home Loan experts and contacted them to inquire about refinancing. Rojan Paudel is a Home Loan Experts mortgage broker known for his ability to find the best solution for clients. Rojan found ways to assist Arthur in securing a loan with a bank. Rojan:
- The client is a strong applicant. He has a steady income and the ability to pay back the loan.
- Payslips can be used to convince the bank that his service income is included in his total earnings.
- Arthur’s rental income had to be included in the servicing for the lender to believe that he was a low-risk borrower.
- Arthur should pay off some personal debts and close credit cards before formal approval to increase his borrowing capability.
- Arthur was able to find lenders that would approve his loan.
The Happy Ending
After all his hard work, Arthur was approved without condition for an investment loan of almost $1 million at 4.41% per year for a 30-year term. The new monthly payments were nearly $1,500 lower. He can now make his monthly payments without having to worry about rate increases.
We can help you, too!
Arthur is just one of many clients who are happy with our services. You can be, too. Talk to Home Loan Experts mortgage brokers about your financial situation, and they’ll help you find the best solution based on your goals and requirements. For expert advice, call us at 1300 888 743.
Falling Property Values
The chart below compares the rate at which housing values declined during the first month after rate increases (May) with the second most recent months (November). The chart also shows the decline in value from current peak levels.
CoreLogic reported the first monthly national fall in housing prices this year, by 0.1% in May. Then, in August, it accelerated into a fall of 1.6% – the biggest month-on-month drop since 1983. While values are still trending downward, the rate of decrease has slowed to -1.4% in September, -1.2% in October, and -1.0%, respectively. The decline in November reached its eighth consecutive month. Since the first rise in interest rates, the national dwelling value has fallen by 7.0%. This is more than the downturn of 2008-09. This was largely due to the increasing interest rates. They not only reduced borrowing power but also discouraged potential buyers from borrowing at all, leading to less competition in the housing market.
In most regions, rental market vacancy rates remain at or below 1%. Rent values increased by 10.2% annually in the period from November to December, a result of tight rental conditions. Gross rental yields continue to rise rapidly due to the combination of rising rents with falling dwelling values. The national gross rental profit was 3.71% in December, up from the recent low of just 3.2% in January 2020.
Some distinct factors guided the country’s property market downfall in 2022. We saw sharper declines in expensive markets and greater resilience in affordable housing markets. The pace of decline has been easing since September, and it could re-accelerate in 2023 if the interest rates surge. Interest rates that now sit between 5% and 6% are expected to increase by 75 basis points if experts’ predictions of the cash rate reaching 3.85% by the middle of 2023 come true.
Market Outlook 2023
housing market trends in 2023 will be influenced by the RBA’s monetary policies, migration, and rental trends.
How high will interest rates go?
RBA Governor Dr Philip Lowe warns of a possible increase in inflation in the coming months. A sustained fall in inflation is anticipated before the end of 2023.
Otto Dargan, founder of Home Loan Experts, says that when banks calculate someone’s borrowing power, they factor in the fact that rates may rise by as much as 3%. If the RBA raises rates by another 3% next year, many people who bought homes between July 2020 and December 2022 will struggle to pay their mortgages. Westpac and other banks are expecting that the RBA’s cash rate will reach 3.8%. If they’re right, many people will be unable to make their payments.”
The central bank can accept either higher inflation or more mortgage stress, he says. The RBA is aware that any rate increase will lead to a significant amount of mortgage stress. It’s therefore likely to be cautious and closely monitor the data between now and February when it holds its next meeting.
Alan Hemmings, CEO of Home Loan Experts, adds that “what may slow down further cash rate increases, over the next twelve months, is that 30 percent of outstanding mortgages with cheap fixed rates will be moving to variable rates.” Around $270 billion of mortgages will see interest rates increase by 3%. This will put additional pressure on household budgets and help curb inflation.
The majority of economists predict that interest rates will reach their highest level in the coming year. Senior economists at the big four banks made predictions about how high-interest rates would go.
ANZ The cash rate could reach 3.85% in May 2023, with monthly increases of 25 basis points.
CommBank: The cash rate will reach a maximum of 3.5% in February 2023. After that, it may pause.
NAB The cash rate will reach a maximum of 3.60% in March 2023 and then remain stable throughout the rest of 2023. It will then fall again to 3.60% by March 2024.
Westpac Cash Rate will increase to a level of 3.85% by 2023, with the potential for a decline in 2024.
The cash rate will be 3.10% at the end of the year 2022.
Will House Prices Drop In 2023?
The movement of cash rates and the instabilities that accompany them are closely related to the direction of house prices. Lowe has already hinted that the RBA will not cut the cash rate until next year. It means that further price drops are guaranteed until the middle of next year. RBA documents revealed that house prices could drop 11% nationally by 2023. Prices may even drop by 20% if people are more cautious due to rising rates and falling house prices.
Dargan said that Dargan and other economists believe houses in Sydney, Melbourne, and other markets will fall more than they do in the rest of the world. It would also mean that they are more likely to stop dropping before other markets. Apartments will likely fall less or remain stable as their value has not increased as much as it did during the pandemic.
Will The Slowdown In The Pace Of Decline Continue?
In November, the national rate of housing value decline slowed from its peak in August of 1.6% down to only 1.0%. Although the rate of decline in housing values has slowed, the market is still at risk.
- This trend could be accelerated by further increases in interest rates or a deterioration in the outlook for the labor market.
- Prices may continue to fall as a result of more motivated sellers. Prices should continue to fall as homeowners switch from low fixed rates of 2% to variable rates of 5%-6%.
Is A Housing Market Crash Ahead Of Us?
It is unlikely that the housing market will crash. A property market crash would require a lot of sellers to be willing to sell at a discount and no one to buy them. Most economists don’t think it will happen for the following reasons:
- Other factors than interest rates affect home prices, such as household income, unemployment int, international migration, or financial conditions. These factors are all strong.
- The housing market overall is not in distress. This means that most sellers do not have to sell at a loss.
- The RBA, along with the banks, does not want a crash in the housing market and would prefer to support mortgage holders rather than seize their homes.
While a property price crash is not likely, it may take time for the market to recover.
Potential Trends In 2023
First-Home Buyer Opportunities And Challenges
It is possible to buy a home during a recession or a downturn in the market. Due to the uncertainty, many buyers will stay away, which reduces competition and can cause prices to be at their lowest point. In 2023, a large number of new home buyers will enter the market. This is especially true when rental vacancies are common and rents are high. According to some reports, the fear of purchasing during a recession is beginning to fade. Some buyers are hoping to benefit from the slowdown.
However, most first-time buyers will have to compromise and purchase a smaller home because their borrowing capacity is lower now than in early 2022. First-time buyers with stable incomes will benefit the most in 2023.
It would be best if you considered your job stability since most economists predict a relatively low increase in unemployment. Before you buy a home in an unstable market, it’s a good idea to talk with your employer about the plans of their company.
The Return of Investors
CoreLogic data indicated that investor interest in housing would decline in 2022. The lending for investment property fell by 20.2% between April and October, a greater decline than the owner-occupier loan during the same period.
Many investors are planning to buy in the year 2023, as rents are increasing rapidly and prices are nearing their lowest point. Gross rental yields have recovered dramatically over the past year, which is good news for investors. The national figure increased from 3.21% to 3.71% between February and November. This gives investors a chance to benefit from falling values, rising rents, and capital gains. Long-term investors can benefit from the current market as long as they have a higher income.