Aussie first home buyers plunge into negative equity

Last week’s federal budget contained various measures aimed at enticing first home buyers (FHBs) into the housing market.

In particular, the Home Guarantee Scheme was more than doubled to 50,000 places, thus enabling single parents to buy a home with a deposit as low as 2% and FHBs to purchase a home with a 5% deposit.

Sally Tindall, research director at RateCity, has warned that FHBs risk sliding into negative equity and facing spiraling mortgage repayments if Reserve Bank of Australia (RBA) lifts interest rates:

“The concern is [the government] is providing people with a way to spend an incredibly large amount of money on a property at overheated prices,” said Sally Tindall…

“Regulators are saying hold off while the government is saying jump in”…

For people in Sydney who buy a home under the scheme this year, with a 5% deposit at the capped $800,000 price, their mortgage repayments will rise by about $539 a month by the end of 2024, according to RateCity. The house’s equity could also drop by 6% at the same time, meaning they would owe the bank more than the house was worth…

Mortgage repayment and house price forecasts.

These calculations are based on Westpac’s cash rate and property price forecasts to 2024.

Westpac’s forecasts aren’t even that bearish. The bank forecasts a “terminal peak [in the RBA cash rate] of 1.75% by end 2023”, alongside a moderate 12% decline in national dwelling values over 2023 and 2024:

Westpac dwelling value forecasts

Westpac forecasts two year house price correction.

The latest futures market forecast has the RBA hiking the official cash rate (OCR) by 3.25% by August next year (yellow line below) – equivalent to thirteen 0.25% rate hikes in only sixteen months:

Futures market interest rate forecasts

Fancy 13 interest rate hikes in only 16 months?

If the RBA followed through with the market’s forecast, then the average discount variable mortgage rate would lift to 6.85% from 3.60% currently, with the median monthly mortgage repayment rising a whopping 44%.

Using the Sydney example cited above by Sally Tindall, monthly mortgage repayments on an $800,000 Sydney home would rise by $1,284 under the market’s interest rate scenario.

FHBs better hope the futures market is wrong on interest rates. Otherwise, they are facing a crushing rise in mortgage repayments, alongside deep negative equity as house prices collapse.

Providing government-sponsored mortgages to people with 2% to 5% deposits is a bad idea at the best of times. It is even worse when the market is topping-out and interest rates are about to rise.

Unconventional Economist
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Comments

    • Know IdeaMEMBER

      Quite. At least in general terms, most predictions seem to be based upon market forces prevailing and for regulators and governments to take a passive role as house prices decline. I am not so confident events will pan out that way.

      • Torchwood1979

        We’ve seen this movie before. Market forces start a correction and then the RBA, Government, APRA or all three start tweaking things to lower rates, stoke demand, loosen credit restrictions etc.

        Had the market been allowed to play out over a decade ago we would not have house prices this high or interest rates this low.

  1. The bank of Swampy’s prop property desk is forecasting no house falls in the regions in the main – just some negative sideways movement

      • And millions of immigrants with a get out of debt jail free card called a foreign passport! Negative equity is going to be premium quality schadenfreude.

  2. The Travelling PhantomMEMBER

    That’ll not happen, the RBA clearly won’t change the interest rate till after election and like in 2019 (confirming political position) as soon as Scomo won house prices started to climb.
    Expect:
    loss of Labor
    Negative interest rates
    300k immigrants by end of 2022

  3. Providing government-sponsored mortgages to people with 2% to 5% deposits is a bad idea at the best of times. It is even worse when the market is topping-out and interest rates are about to rise.

    Perhaps.

    But if what you say is right or wrong depends upon the answers to a set of basic questions.

    1) What is the purpose of money?
    2) What is the purpose of interest rate?
    3) What is the purpose of housing?
    4) What is the purpose of a private housing market?
    5) What is the purpose of government?

    If the answer to these questions is old-fashioned, then your statement is right.

    But if the answer to these questions is new-age, then your statement is wrong. If Morrison gets to answer all five questions his way, then providing government-sponsored mortgages to people with 2% to 5% deposits is a great idea.

    • Jumping jack flash

      Interesting and yes I agree.

      The thing to note is that all of these things in your list have changed definition and purpose over the course of the recent period of the golden age of debt, and the rise of the banks.

      Traditional economic theory based on a productive economy where debt is [only] used for increasing productive capacity flies out the window. Everyone tries to fit the square peg of traditional economic theory into the round hole of the debt economy, where debt is just magicked up and spent on whatever, and as long as debt gets created fast enough it gives the impression of a properly functioning “traditional” economy.

      The main problem becomes that traditionalists will soon wake up and recoil in horror at what the economy has turned into after a generation of running primarily on debt spending, and then we’ll have to make some tough choices.

    • bubbah buddhaMEMBER

      Dont you know that unmarried single parents who specifically are targeted for these loans are the income producing drivers of the economy?
      Theyre increasin the future population of workers and investors faster then you can say ‘handout’

  4. DodgydamoMEMBER

    They are still not allowed to access super for deposits… the show ain’t over yet folks! That said anyone stumping up less than 20% is at risk of negative equity that’s why LMI is required.

    • That said anyone stumping up less than 20% is at risk of negative equity
      Sensible advice but it does imply that 2020 RE prices were ah sensible.
      Unfortunately we have to wind time back till the last millennium to find sensible RE prices especially in Sydney.
      It’s no longer a market that could suffer a 20% correction, we’re talking about a market that could easily fall by 50%.
      Now what happens to this magical economy if RE prices halve?
      People will try to hang on to their homes and thereby crush the broader economy.
      The time for sensible policy was 20 years ago, then it was 10 years ago then it was 5 years ago, today I suspect we’re past the point where any sensible policy intervention is even possible.
      As a result I tell young people to take out the biggest mortgage they can get with the lowest down payment. Keep your assets hidden but liquid and make sure you have options to leave if (or more likely when) the shtf.

      • The Grey RiderMEMBER

        I agree…historic price graphs suggest circa 2000 prices would simply be a return to the LT trendline. Overshoot is a possibility.

  5. In the words of the great writer Ernest Hemmingway

    How did you go bankrupt?” Bill asked.
    “Two ways,” Mike said. “Gradually and then suddenly.”

    And that’s how easily it happens, everything is OK, then it’s manageable and then all impossibly F’ed up.
    We’re naturally going to find ways to bail out these underwater mortgage holders, but if the magic RE wealth machine has ran out of steam then we won’t be helping them.
    Gradually then Suddenly, it does seem to be how these things happen.

  6. GeordieMEMBER

    My fear as a first home buyer was that when I looked at the place and removed all the value-add rorts like unjustified high-density zoning, rental potential, and the zero-real-rate mortgage premium, the house and land would be worth around 50% of what we paid. Thus the potential downside (which sadly would be the “sensible housing policy” scenario) means losing hundreds of thousands of dollars.

    I still support sensible housing policy.

    • For me it was lose 50% in the value of the house or 50% in the value of my stonks. Since all markets are over valued. You could argue NASDAQ is less of a bubble due to their money printing abilities, for me this is why I’m trying to pay down the debt quickly to prepare for that rainy day that never seems to eventuate. However this time I think inflation is going to be the thing that forces rates materially higher for a period of time on the back of energy and food costs.

      • GeordieMEMBER

        Yeah, I agree entirely, Gavin. I bought a home, not an investment, so as long as we can service the mortgage and feed the kids, we’re happy. Pretty bloody f’ed when that’s the bar set for “happy”, but yeah, welcome to modern Australia.

        P.S. I’ve given up trying to guess the economic future, because as soon as things look like they’re on trend to go one way (i.e., not up), someone hosts an intervention and we’re all good again. When that doesn’t happen or fails to work it is going to be one hell of a party.

        • RE: Economic future I can’t say I’m any better at predicting things either. That’s why I keep buying BitCoin because I actually trust it more than I do fiat currency at this stage. I don’t have a huge amount in there, but I figure it’s a good hedge against the stupidity of what’s going on and it’s a backup plan for a doomsday scenario. For example if China invaded Australia, your house ain’t going to be worth anything in that scenario, or vintage cars if you fled the country, the only asset you can take with you easily is something like BitCoin. Of course I don’t think China is likely to do that, but many Ukranian’s didn’t think Putin was gonna move in either.

          When it comes to my house it’s obviously increased in value in the last couple of years, but I anticipate it will fall back to what I paid or maybe even dip below what I paid for it (with rates going back up), which is why I haven’t leveraged my “equity mate” to buy other things. For me it’s about keeping my exposure to risk low (especially when it comes to the family home). If Real Estate does crash, then on the bright side our kids may have a chance of buying a home for a reasonable price.

          With my classic cars every time I feel prices should drop, they keep marching up. Although I’m starting to see more supply hit the market which is either people cashing out OR needing cash because they are struggling (I suspect the latter), it’s going to be interesting to see if sellers need to discount prices to attract buyers – given the competition. Although some of my cars are 90s JDM classics which are now accessible to North American buyers (due to 25 year old import rules) and any drop in demand locally seems to be offset by international demand pushing prices higher again.

          I’m not selling my stocks because they are exposed to $USD (denominated) and as far as I can tell the companies in the NASDAQ are still performing strongly so I try and ignore the short term bull/bear markets and just stay LONG. Since I don’t need the money right now and I’m not a short term speculator/trader.

    • Geordie, whatever happens you can take comfort knowing it will not be your fault. You were simply born in the wrong decade. Take comfort knowing that all those Porsches, BMW’s and beach houses have not been paid for with innovation, hard work and high incomes. Most have been paid for with unearned housing equity by people who bought much earlier than the rest of us and wanting to do normal things, like house there families.

  7. As a FHB in 2009 we are still on 1.79% variable, paying >$1600 more than the minimum P&I. Whilst the current FHB’s will struggle, what is the % of these compared to all those who purchased pre-2019 and have a buffer…<4% unemployment rate, get a job, second job, kids can work…

    • Jumping jack flash

      Well done, I’m repaying about 1k over the minimum P&I at 3.5% (each month) but the problem becomes that as soon as the debt stops growing fast enough the interest will suck the life out of demand, and with it wages. My wages are above average at the moment and that’s really the only reason I can afford to repay so much. If my wages are cut through redundancy and needing to find another job in a hurry due to shrinking demand and company profits as the demand is redirected to interest, then all bets are off.

  8. Jumping jack flash

    ““Regulators are saying hold off while the government is saying jump in”…”

    I want to know who are all these regulators who are saying not to invest in houses.