Mortgage shock to crash property prices “back down to Earth”

The latest data from the Australian Prudential Regulatory Authority (APRA) showed that around one quarter of mortgages originated in the December quarter of 2021 were at a debt-to-income (DTI) ratio above six times, up from around 15% pre-pandemic:

Highly leveraged mortgage lending

Highly leveraged mortgage lending boomed in 2021.

In dollar terms, $137 billion worth of mortgages were issued at a DTI ratio above six times in 2021, up from $55 billion in the pre-pandemic 2019 calendar year.

With the Reserve Bank of Australia (RBA) now hiking interest rates, financial commentators are growing increasingly concerned that many recent home buyers could face severe mortgage stress.

For example, survey by financial comparison site Finder found that almost one-in-three Australian home owners were under stress before last week’s rate rise, which will only worsen as mortgage rates climb:

“The past two years have seen a record number of buyers enter the property market, but many haven’t budgeted for a rainy day”, [Finder’s Sarah Megginson said]…

It is a theme emulated by RateCity research director, Sally Tindall, who warns that RBA rate hikes will apply a “significant handbrake” to Australia’s housing market by severely restricting how much buyers can borrow. In turn, prices “could actually come back down to Earth”:

A family with two kids, where one parent works full-time and the other part time at half the wage, on combined annual income of $150,000 before tax, will be able to borrow an estimated $26,200 less as a result of the May RBA hike.

However, by May next year, if the cash rate rises to 2.25 per cent, this same family would be able to borrow an estimated $156,500 less than they could have before the May RBA hike…

“Falling interest rates have been a driving force behind soaring property prices over the last 18 months,” [Sally Tindall] said.

“Now home loan rates are on the rise, property prices could actually come back down to Earth – or, at least, closer to it”…

“As a result, they’ll suddenly find they can no longer bid as high at the next auction they go to,” Tindall said.

“If the rate hikes keep coming, as they’re forecast to do, people could find their home buying budgets shrink further and further.”

Most economists are tipping the RBA cash rate will rise by more than 200 basis points from their pandemic low of 0.10%.

The below table from CoreLogic estimates the impact on mortgage repayments, based on an 80% loan-to-value ratio principal and interest loan on the median priced dwelling:

Mortgage repayment projections

Mortgage repayments to surge.

If mortgage rates were to rise by 200 basis points, then monthly repayments would soar by $668 a month nationally, and by $738 across the combined capitals, representing a 28% rise in mortgage repayments.

The impact would obviously be much worse in Sydney ($1,006 a month increase), owing to its higher housing costs and jumbo mortgages.

Not only would mortgage increases of this magnitude put many households under severe strain, but it would very likely tank house prices and slice consumption spending as mortgage servicing gobbles up household budgets.

Unconventional Economist

Comments

  1. Goldstandard1MEMBER

    It’s the FOMO that has dried up now. There are A LOT of ppl who didn’t believe a stock and bitcoin crash could happen and it’s happening. Even ppl just watching are watching how far it’s going and this one seems like a big one. Crashes into interest rate rises – food trucks needed stat Bnich. This one is no joke.

    I’m waiting for ppl to buy the dip thinking losses can be made up then it keeps going. That is the real blood on the streets.

    • I haven’t been buying stonks or BTC for a few months now. I’m just waiting to see where this ends. I suspect Fed will reverse course soon enough, just waiting for inflation to drop a bit back. Then they will ease back a bit. Market will bounce. Nothing will be fixed of course.

        • But is monetary policy driving inflation or de-coupling of global co-operation and trade? I suspect monetary policy is an accelerator but not the actual cause – since we’ve had rock low rates for 10 years and still faced deflation. So I see increase in rates unlikely to fix inflation, at least not in essentials. It will stop assets inflating as people won’t have money for big ticket items, but not so sure we will see food costs and accommodation costs decline (given materials shortage etc..).

      • The great reset has been well telegraphed by the WEF and Co. Whether Russia/China are cooperating or spoiling is another matter. Based on incentives I’m guessing the latter.

    • TRADINGtheAPOCALYPSE

      Apparently the proud and strong independent nation state of el Salvador is buying the bitcoin dip. That should fix teh thing 😂😭

  2. I was talking to a mate of mine who is very senior in one of the banks. He said since the pandemic, they’ve been testing everyone on a debt servicing ratio that assumes a 3% increase in the mortgage rate.

    Debt to income is a meaningless measure because it doesn’t take into account the interest rate. Debt servicing is the only one that matters.

  3. BradleyMEMBER

    In my lifetime, I have seen boom and bust. On one occasion, I was stuck with a house that was no longer suitable, it took over a year to sell at the SAME price I bought it for 4 years earlier. Eventually , someone did and I then bought after auction ( zero bids on day). All this debt in a rising rate market will see some suffer, like I did and some prosper, like I did. I will look at moving again in 2023 as that is when I think the carnage will be well under way. As I am downsizing, fingers crossed I can play the timing to my advantage, one last time.

      • BradleyMEMBER

        Not ready to give up the lifestyle here yet. My bet is my nice regional home will be enough for a capital city villa or town house with some change left over. If I get stuck here, it wont be a problem until I hit 70.

      • boomengineeringMEMBER

        You just gave me a visualization of the labour hire boss I had when I needed to go out and about, away from lone work in factory. He had a heavy Brit accent and the other guys used to imitate it (fooorrkin elll ) . As it happened he had the same Welsh surname of my missus and the same hereditary roots, Jamaican, as well.

    • BubbleyMEMBER

      There’s already a lot of new property entering the Darwin market and I’ve seen a few “New Price” listings – a nice way of saying price reduced already.

      Anecdotal info –
      I had a chat with a Queensland builder last week. He’s been crazy busy since the 3rd month of the pandemic.
      He’s in a good position, his parents are going travelling for a year, so he’s going to sell his house live in his parents place for a year rent free. By then he expects the market to have dropped as he currently thinks its crazy and will buy the drop.

      This depends on selling his current home, but most purchasers like to buy a builders home as they think it will better built than most.

  4. Mortgage shock to crash property prices “back down to Earth”
    dream on
    will Mortgage shock create additional houses, or somehow lead to interest developing in alternate investments, until these two things happen housing will remain the preferred investment and investors will always be able to out bid first time buyers (just by the nature of capital accumulation and the RE ladder)
    There’s simply no variant of a mortgage shock which favours young families over boomer investors, none absolutely none.
    If this mortgage shock shakes a properties loose from the weaker hands (recent investors ) than they’ll be quickly snapped up by well healed investors….it’s just what will happen.

    • Whatever the case, advantage or disadvantage, who loses, who wins, in Australia’s case we need people to puke at the mere thought of trading real estate. The death of mindless property hysteria happened in the late 80s and then took over a decade to resurface, it’ll come again.

      • That’s the thing, I don’t think there’s any possible change which will result in a broad investment portfolio reallocation away from Housing.
        I just can’t imagine a change so monumental that it would shift Aussie sentiment away from RE. and here’s the thing. If such a change were to occur would it leave us with a strong capital base from which to pursue alternate investment strategies? (nope the answer because RE is fundamentally a highly leveraged investment strategy so after the party all we’ll be left with is the debt)

        • boomengineeringMEMBER

          dodgy as,
          You will be pleasantly surprised. Strange things happen in economic downturns.
          Most of those expensive European cars just disappear off the roads. Where do they go ? Some things just don’t make sense.

      • As an example, consider the recent MCB / AGL debacle
        on the one hand we have a young investor with a good understanding of emerging power systems who is prepared to invest many $B into AGL to make it the power supplier Australia needs for the future.
        On the other hand we have a old school fossil fuel company making the most cynical demerger imaginable so that the Aussie public gets stuck with a “stranded power station asset” and the rest of AGL screams that’s not mine as a steaming heap of s#it emerges from the deal.
        AGL’s strategy is beyond cynical yet it looks likely to succeed …like wtf
        https://www.smh.com.au/business/companies/cannon-brookes-warns-rebel-alliance-is-building-against-agl-s-board-20220509-p5ajp2.html

          • It’s beyond BS,
            AGL management claims to have a strategy but it’s a not strategy, it’s just a cynical End of life Asset value maximization trick.
            In the end who exactly will be fooled? Are renewable investors suddenly shaking in the boots because AGL has a “strategy” no they’re laughing so hard they’ll be lucky to not bust a gut and give themselves a hernia.
            This is what the big-end of town calls “Investing” it’s pathetic.

    • There are no well heeled investors, just ones leveraged to the hilt. That’s what happens when the only game in town is unleashing equity. As for the housing shortage well that corrects when migrants discover they are out of work and hundreds of k in negative equity. They will head back home to escape the debt. The current rental crisis is caused by low unemployment. Recession will fix that. No job no rent.

      • Yes a recession might “fix” things but a recession won’t suddenly make alternative investments attractive.
        \Young Aussies won’t suddenly become experts in Robotics or AI or Internet systems Or or or
        Older Aussies won’t suddenly become comfortable investing in in areas especially risky ventures like High Tech investing (venture capital / angle investing) it just won’t happen
        So the recession might fix things but not necessarily for the better.
        Eventually things will change but we’re talking time frames like Turkey’s economy recovering after the fall of the Ottoman Empire (it took almost 100 years) or China recovering after the Qing dynasty (two world wars + Japanese occupation + civil war and 100 years later) China started to emerge from its trip to economic stupidity.
        that’s the order of Australia’s economic capital and labour misallocation. it’s epic, it’s monumental, it’s bigger than …

      • I would really love to see the banks get cleaned up by all their BS loans to non citizen imports who will depart at the 1st sign of trouble. Distressed assets purchased by foreigners with high levels of laundered money becoming the banks problems…oh I can hope.

        • Yeah that would be funny, but I’m guessing the banks have other ideas and than there’s the whole bogus concept of supporting industries which are TBTF.

  5. [2022-05-10T02:57:33.921Z] Executed ‘Functions.downtoearth’ (Failed, Id=cx3223333-6cb7-40c7-bd00-fed576445a2b, Duration=28756ms)
    [2022-05-10T02:57:33.922Z] System.Private.CoreLib: Exception while executing function: Functions.downtoearth. System.Private.CoreLib: Result: Failure
    Exception: Error: const downtoearth undefined

    • boomengineeringMEMBER

      Hey Swamps, replied earlier, policy of not riding in rain unless getting caught halfway.
      And I can name quite a few well heeled investors of the late 80’s.
      Bond, Skase are the first to come to mind, and later Tinkler.

  6. To think at the height of the boom, Perth and Darwin were nation leading with price growth…., Perth reaching near parity with Sydney around 2007-8…

    I don’ know if managing prices then was back accident or by design, if the latter, well done to them governments.

    • Property investment in Perth has been very cautious. Many people have been happy to sell in the last two years now that they have got back to 2006/7 purchase price. The market felt like it was getting some belief that maybe we should join Sydney and have a real estate party – and thankfully it seems that excitement will be knocked on the head before it gains traction.
      Despite appearing relatively cheap compared to Sydney and Melbourne I think that Perth property is still actually expensive so heaven help the rest.

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