Aussie first home buyers are about to get slaughtered

Recent Australian first home buyers should feel aggrieved at the Reserve Bank of Australia (RBA).

In 2020, the RBA dropped the official cash rate (OCR) to a record low 0.1% and then spent the following 18 months assuring Australians that rates would remain on hold until 2024.

As explained in The AFR by CBA head of Australian economics, Gareth Aird:

“Lots of households transacted in the property market through 2021 under the assumption interest rates weren’t going up until 2024 at the earliest because that’s the message the central bank was giving”…

Aird says a common refrain was: “If rates aren’t going to go up, prices aren’t going to go down, and we should just get in now”. This was reflected in the massive rise in the number of first homebuyers getting into the property market.

Infected by FOMO, First home buyers piled into the market en masse, as illustrated by the surge in mortgage commitments between mid-2020 and mid-2021:

First home buyer mortgages

According to Finder, three quarters of first home buyers purchase with deposits below 20%. Therefore, they are typically highly leveraged and very sensitive to rate hikes:

First home buyer deposits

This is also reflected in the pandemic lift in the number of buyers that originated their mortgages with a debt-to-income (DTI) ratio above 6-times, a large share of whom were first home buyers:

High risk mortgage lending

With mortgage rates projected to hit 6% to 7% next year, recent first home buyer purchasers are facing a monstrous lift in mortgage repayments at the same time as the value of their homes falls sharply, which could push many into negative equity.

The impact will be especially from 2023 when borrowers that entered the market on fixed mortgage rates below 2.5% finish their loan terms and are required to refinance:

Fixed mortgage rates

Many will face a doubling to tripling in mortgage rates.

Recent entrants are always hardest hit by housing corrections and rising mortgage rates. On both counts, Australia’s first home buyers are facing a nasty two year period of soaring repayments and negative equity.

Unconventional Economist

Comments

      • DingwallMEMBER

        Yes and Labor….. all parties have desperately seen housing as our savior and, for some reason, the only avenue for an economy……and will pump it.
        Enticing FHB’s with, effectively, bribes to enter the market is just another pump action.
        Get rid of negative gearing, get rid of foreign ownership, reduce immigration, get land taxes in place, ban lobbying, beat councils and State Gov’ts senselessly to release land and actually do some proper town planning including retaining green space……………….. the dream.

      • Banks. All govt parties failure to pass second tranche is anti money laundering Bill, relative to property. Negatively geared pollies, record holding 10 years ago was 30 neg geared dwellings held by one taxpayer funded pollie chap supposedly working for us.

    • Strange EconomicsMEMBER

      The RBA sucked the last punters and FHBs in for the top of the ponzi,
      just like betting ads during the AFL for BetSmart, BetDumb and the others.

      Come on in, you can’t lose.

      Still even they will only lose 10% if they bought last year and survive , and everyone else is still up 100%.
      House prices need to drop 50% to be affordable now.

    • it began with the traitor called john howard.
      he started the mass immigration intakes that are still going today … a never ending flood of mostly ‘brown man’ immigration that placed continuous upward pressure on housing prices, an upward pressure that could only be maintained by lowering interest rates more and more.
      we are now at the end of the fuel that is interest rates. however will the traitors attack the fuel that is the root cause … mass immigration?

    • bcn here
      When I said a year ago Aust 10 year would go to 3% when it was 1%, I was laughed at
      Look how quick it’s moved up to 4%
      We are near the top now but they’ll print more money because they have nothing else
      We are going to have a serious recession & downturn, the biggest housing crash but there won’t be much of a bounce back
      If you were old enough to see late 1989s mortgage rates were 17%, you are going to see rates keep rising

      My guess is over the next 5 years you’ll see rates higher than 1980s 25% this time, going to see inflation well above 20% maybe 30%

      You’ll never get a buyer for many houses
      Prices will fall min 60 to 90%
      You are going to see a commodity super price boom beyond imagine
      Petrol $10 per litre, 3x the cost to build compared with pre pandemic
      How does the maths work

      You can borrow 75% less but building costs 3x

      Say good bye to the big 4, they won’t be here this time next year

      Good luck !!!!!

      PS bond yields near the highs for the time being
      Don’t get caught up in the hype

      The ones that were saying at 1% IR we were going to 0 will now say we have a long way up to go

      They always all do the same thing

      RBA doesn’t set interest rates the market does,that should be obvious now !!!!!

      • Diogenes the CynicMEMBER

        Nice calls. Aussie bond yield at 4% – didn’t think I would see it for at least 2 years, the move up has been rocket like.

        • bcn

          Diag

          I tried to tell you how fast rates would rise
          Not much more upside.
          You haven’t see anything
          I think we will get well into 20s, 30s% interest rates 4/5 years out
          We have labor in we will see MMT & RBA has no say
          The market determines int rates in inflationary periods
          All this shxt RBA won’t let it happen, bond market dictates

          What I got wrong, I didn’t know the 1,2,3 year bond would go as high, I kept saying 10 year & 4 or 5 year fixed rates

          I just can’t possibly see how the banks can’t raise the variable up 1% here without RBA

          All variable rates should be min 3.5% to 4% & fixed will have a 6 handle soon

          4 & 5 year fixed rates will start falling first, from 6s down, they’ll have to

          My first job out of uni was a bond money market dealer in late 1980s

          I saw companies paying 23 to 25% just before 1990 recession

          You’ll see a 30 handle this time but 4/5 years out

          • Sorry mate I think you are bit confused. You had interest rates going down not up most recently.
            You also had inflation peaking a month or two ago, AUD going to 0.80+, Iron ore going to $300.
            https://www.macrobusiness.com.au/2022/05/mortgage-repayments-to-double-for-half-a-million-aussies/


            Trump did win, he had the election stolen by the left

            I also said iron ore is going to $300 & AUD into 80s & that’s over the next 6 to 12 months, that’s where we are headed.

            We are about to start the next leg up in the commodity super price boom

            And now all the clowns are saying interest rates are going up, all the ones who said a year ago rates were going to zero

            Interest rates are now on the way down – you guys all missed the boat when it left dock

            The fact is I got home loan rates right……that what’s the discussion is about & id have to say at the start of last year when I said home loan rates would increase up to actually these levels, I don’t think anyone was saying that
            All the numb nuts were listening to the RBA saying rates would stay at 2% for years ….. & all the other parrots just say what’s on TV

            Fixed rate home loans are heading back to 2% over the next year

            Who knows what RBA will do, I’m sure they will do a few hikes & tip everything upside down into a collapse

            https://www.macrobusiness.com.au/2022/05/australian-dollar-sucked-into-american-inflation-black-hole/

          • Strange EconomicsMEMBER

            Late 1980s., so…

            “You’ve seen things you people wouldn’t believe… Attack ships on fire off the shoulder of Orion, … 25% interest rates”

      • My ’89 Mortgage was 35k.
        Would be a nightmare sitting on a 750k to 1000k one now and looking forward.

        • You won’t have $750k loans
          The financial system is going to be wiped out
          We will have a new system
          Our banks won’t surve with 10% plus with trillions
          Governments will be in crisis
          We owe trillions state & fed
          Taxes are going through the roof
          Property taxes will be the big one

  1. Hugh PavletichMEMBER

    Fools and easy money …

    Yahoo Finance

    https://finance.yahoo.com/

    Households in tough financial position with interest rates possibly tripling by Christmas … Australian Broadcasting Corporation News / Youtube

    https://www.youtube.com/watch?v=O9RgAFpPv6c

    Rabobank: Western Leadership Has Successfully Turned Our Economies Into Emerging Markets … Zerohedge

    https://www.zerohedge.com/markets/rabobank-western-leadership-has-successfully-turned-our-economies-emerging-markets

    Japan On Verge Of Systemic Collapse With “Dramatic, Unpredictable Non-Linearities” In Financial Markets, DB Warns … Zerohedge

    https://www.zerohedge.com/markets/japan-verge-systemic-collapse-dramatic-unpredictable-non-linearities-financial-markets-bank

    • Hugh PavletichMEMBER

      UPDATE … Fools and easy money …

      Inflation Data Likely Push Fed to Consider 75 Basis-Point Hike … Craig Torres and Molly Smith … Bloomberg
      … behind paywall …

      https://www.bloomberg.com/news/articles/2022-06-13/inflation-data-likely-push-fed-to-consider-75-basis-point-hike?srnd=premium-asia

      The latest pickups in consumer prices and inflation expectations will probably spur Federal Reserve officials to consider the biggest interest-rate increase since 1994 when they meet this week, after Chair Jerome Powell previously signaled a smaller move was the likely outcome.

      US central bankers conclude a two-day meeting on Wednesday, with a decision due at 2 p.m. in Washington. Powell indicated at his post-meeting press conference in early May that the Fed would move forward with half-point rate hikes in June and July as long as economic data came in as expected. It was an unusually precise steer by the Fed chair.

      But in the past few days, inflation figures have surprised to the high side, pushing investors to increase bets on a 75 basis-point increase at this week’s meeting, pricing in interest-rate futures shows. Those bets hardened on Monday afternoon following a report in the Wall Street Journal suggesting the larger move was now in play.

      Wall Street

      Economists at major Wall Street firms were quick to change their calls. Goldman Sachs Group Inc. and Nomura Holdings Inc. both shifted on Monday to forecast 75 basis point hikes this week and at the Fed’s meeting in late July. JPMorgan Chase & Co. also went to 75 basis points at this week’s meeting, joining Barclays Plc and Jefferies, who modified their calls Friday to the larger increase. … behind paywall … read more via hyperlink above …

      JPMorgan Economists Now See Fed Hiking 75 Basis Points This Week … Scott Lannan … Bloomberg

      https://www.bloomberg.com/news/articles/2022-06-13/jpmorgan-economists-now-see-fed-hiking-75-basis-points-this-week?srnd=premium-asia

      Wall Street Floats 100 Basis-Point Fed Hike as Inflation Stings … Emily Graffeo, Amelia Pollard, and Edward Bolingbroke … Bloomberg

      https://www.bloomberg.com/news/articles/2022-06-13/wall-street-floats-100-basis-point-fed-hike-as-inflation-stings?srnd=premium-asia

  2. Pjmat2
    Leith change the heading to everyone is going to be affected not just first home buyers
    They’ll be the lucky ones, that’ll be the banks problem
    It’s the others that get crucified
    We are all going to get crucified whether you own, rent mortgage no mortgage

    What’s coming in the housing market will not take any prisoners

    Big hike in fixed rates coming

    You’ll see a 6 handle soon. Don’t think we will get to 7% on fixed rates just at the moment

    RBA has no say, bank funding costs are skyrocketing get ready for big out of cycle hikes

    RBA is out of the games, they’ve been lapped 10x

      • bcn
        Don’t even worry about labor
        They’ll borrow spend print etc
        But it’ll be labor bailing out the banks similar to Rudd
        My concern on bail in bail out was who was in government
        Think they’ll protect everyone to $250k here like FDIC $250k
        Above that is at serious risk
        They’ll close the banks to restructure, take away offsets & can’t see them protecting people with $1M etc
        Let’s see who knows what idiotic plan they come up with
        Labor will do MMT Job keeper helicopter money etc
        Won’t be hyperinflation like Zimbabwe we but will we see 20/30 plus % inflation
        Will be very hard to borrow money in the future
        Not sure what solution they’ll come up with, merged national entity
        RBA will do unlimited QE to try & save the financial system & keep people employed but we are going to be fcked with out of control inflation

        Need to own gold our currency will be worthless = you can’t even use for toilet paper

        Really like BTC & Ethereum both great value, might have to wear some more volatility but pretty good we’ve fallen 70%

        IMO I think crypto is good value here

        • Holiday In ScomodiaMEMBER

          Welcome back. Fascinating, and you have been calling it so far. Absolutely agree- buckling up for utterly crazy ideas govs will come up with to try and keep things ticking, also agree polymer money would make lousy toilet paper ha

        • TRADINGtheAPOCALYPSE

          Nice thoughts but IMHO if the rest of it plays out as you say.. BTC and ETH will basically get zeroed. Crypto is 90% made up of speculative flows.

          • kannigetMEMBER

            Didnt they just suspend trading on most crypto because of a ” run on the bank ” ?

        • boomengineeringMEMBER

          BCNICH.
          Don’t believe the $250K. They have worded it in an obscure manner able to be manipulated to $0 if need be.

  3. Tiliqua scincoides

    So interesting that geniuses who can call the market perfectly choose to spend their time commenting on this fringe blog when they could be using their incredible talents to make an unlimited amount of money. It’s amazing that they are so much smarter than the rest of the population who have a lot more at stake.

  4. Arthur Schopenhauer

    And Perrottet is introducing a Land Tax, with the exception of very expensive property…

    This is a case of “be careful what you wish for”.

    • That’s not my initial read on it. I perceived LVT is being presented as the proverbial sh!t sandwich and in a manner doomed to failure. Foment negativity around the concept and blame shift to Fed gov when it doesn’t get support.

      Otherwise why not emulate the way ACT has implemented LVT?

    • alwaysanonMEMBER

      The interesting thing about the proposal is that it is a permanent opt-in to that property being land taxed – forever. You’ll 100% see people start to ask “is this land tax (without the option to stamp duty it)?” and many people not buy it or pay much less for it if it now carries this ongoing endless tax burden. So another two-tier to the property system (those who can afford stamp duty or are ‘grandfathered in’ to not paying land tax benefit)?

      • Tassie TomMEMBER

        Wouldn’t it be simple? If you’re speculating, choose the land tax option. If you’re buying and holding, choose the stamp duty option?

        • alwaysanonMEMBER

          As he is pitching it if you choose the land tax option that house is then permanently land tax forever. One way door – not just for you but every future owner.

  5. If past downturns are anything to go by, the first thing to go is big boy toys, they get dumped for whatever the vulture end of the market is willing to pay.
    For the last 2 years (if not more) big boy toys has been one of the hottest sections of the economy.
    Five years back an 80 series diesel landcruiser would sell for under $10K today that same car (with an extra 100K on the clock) sells for $30K …it’s F’ing crazy
    Same thing for anything to do with boats. At the low end, a basic used Tinny can easily sell for over $10K before you add $1K to $2K new electronics ..f’ing crazy
    Collectable cars (or anything Japanese from the late 80’s / 90’s) sells for crazy money often 5 times what it got five years ago.
    And don’t talk to me about yacht prices ….

    All this has to reverse, every bit of this fluff will disappear overnight if average Aussies need to make a choice between keeping the house and keeping the toys. Often, from what I’ve seen in the past, it won’t even be a matter of choice, this stuff will be repo’ed and disposed of for them. Marriages will break down, mental health will take a reality break and drug use will skyrocket.
    If Interest rates hit 7% then all this is carnage is coming to a house near you.

    • Yup, talk about large increases with toys. With aeroplanes, mass produced used Cirrus aircraft that were selling for $300K two years ago are fetching $800K now. Insanity.

    • I saw this in 87 – some very cheap 911s around. Not too sure it will happen this time as most toys have been purchased by cashed up boomers who have good super, asset value increases and big inheritances behind them.
      This time it will be the sheeple who bought property in last 4 years and DH tradies selling their $90k Raptors who will pay the price.

        • There is no denying they are real life Tonka trucks – ie toys. Nearly all trades people are better off with vans for cost, security, practicality and manoeuvrability/parking on small allotment building sites. To me it’s.just the DH tradies that buy these things. I won’t engage a tradie who owns one.

    • This. As long you don’t take aim at the house, this excess will be around. And it is targeting this excess that will need to be priority. Punters don’t care to blow equity on this stuff until this stuff threatens equity.
      Problem is,it is trying to do an open heart surgery with a blunt tool. Chances of you not overshooting is actually quite slim. So off we will go over the edge.

    • boomengineeringMEMBER

      Bills.
      In agreement. Could have retired many years ago but one of the things holding me back was,,, in future bad times who is going to pay for it ??

      • Migrants. That’s the main reason we do the population ponzi. Because the pension is a ponzi.

        • From what I’ve read the pension isn’t the problem, it’s the super rorts that make it a problem.

    • Arthur Schopenhauer

      Australia has one of the lowest pensions in the OECD.

      Concur that it’s the Super Rorts that really cost the system.

  6. Perrottet’s land tax scheme has HUGE implications for the housing shortage and house prices.

    If future govt is smart and decent, it can easily encourage more people to take the “optional” ongoing land tax stead of stamp duty:
    * stamp duty can be massively increased
    * developers must state on their application if they want the land tax “option”
    * a development of say 5 houses that includes 1 on land tax must be entirely on land tax when finished.
    * etc

    Imagine two suburbs, suburb A is entirely stamp duty and is paying govt no ongoing land tax, suburb B is entirely land tax and any increase in land value will cause a rise in tax flowing to govt.
    Which suburb would govt be most likely to build a railway station at?

    As I said land tax has HUGE implications.

    • Strange EconomicsMEMBER

      Its a furphy to waste time talking about, then forget about again.
      The Labor govt is never going to support or kick in for something that sounds like a tax on housing.
      It could just windfall tax on energy companies if it was going to do any taxes.

  7. I know 2 FHB’s who entered right on peak, however they didn’t over-leverage, and will handle these rate rises.

    Those buying >$1.5m properties may just be those who entered 10+ years ago, and had enough equity to upgrade.

    Just a thought.

    • Fresh roasted FTHB, son. Nothing else in the world smells like that. I love the smell of roasted FTHB in the morning. You know, one time we had interest rates rise, for 12 consecutive months. When it was all over, I walked around. We didn’t find one of ’em, not one stinkin’ FTHB’s . The smell, you know that freedom smell? The whole city. Smelled like… victory. Someday this war’s gonna end.

  8. Thank you Leith. Yet again clarity where the govt does not grasp, does not understand the full picture.
    Like the energy issue, well known well anticipated and decisions put in place to cause these problems.
    And the bastards don’t get it. Govt by amateurs acting in shallow short term self interest.

  9. 2023HomelessMEMBER

    I’m wondering if anyone has done research into how the bank of mum and dad responds to price declines and rate rises? My gut tells me parents won’t loan as capital in their assets declines and they done think their kids homes will go up. So the bank of mum and dad could be more pro cyclical than banks. Plus the bank of mum and dad is for deposit hurdles, so leveraged, meaning a drop off would have a much greater impact on total borrowing power of first home buyers.

    Any thoughts?

  10. Not sure how falling house prices are bad for home buyers. Interest rates do t get you in the long run, the principal repayments do.