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House prices falling, as mortgage payments grow

In 2022, the value of the average Australian house fell 5.25%, compared with 2021. For many households, that is little more than a paper fantasy, but for those who have to crystalise the value – by selling – it can be more serious. Little wonder then that the value of housing loan approvals 35.0% lower in January, on a year-on-year basis.

This initial chart shows the magnitude of the declines and yes, it also points to the inevitability that was written into the peaks of less than two years ago.

The linkages between housing prices and the availability of housing is not precise. The cause and effect can often be blurred between wider economic factors (eg. is the economy growing or contracting? What’s the impact on levels of employment and so on?) The relationship is often as simple as the cost of money (eg. interest rates) and in turn, housing affordability.

The recent ABS House Price Data series for December quarter 2022 combined with the Housing Finance data provides a good insight. The declines in housing finance which commenced in May 2022 concurrent with the increase in interest rates has now flowed into house prices. As we said at the outset, in 2022 they were 5.25% lower on average than a year earlier.

Given the scale of increases experienced during the COVID period of ‘emergency’ interest rates, it is not surprising that the declines in the prices of houses are greater than the declines for apartments.

However, despite the levels of price falls, median house prices are still higher than pre pandemic levels. The ABS data is presented for Capital Cities and the example for Melbourne shows median levels in December 2022 at $842,000 compared to December 2019 (pre pandemic) of $760,000. Even adjusting for inflation, the median house price in Melbourne has risen, despite the falls of 2022.

Against this background a number of commentators are of the view that house prices still have further to fall. The ABC’s Michael Janda, reported in early March, comments from Tim Lawless, the Research Director at CoreLogic, that:

“…the prospect of further interest rate rises, weaker economic conditions and a rise in unemployment over the coming months all threaten to cause another down leg in property prices.”

Janda also reported the comments of Shane Oliver, the Chief Economist at AMP, saying:

“…the market was only halfway to what he expected to be a roughly 15-20 per cent peak to trough fall, which would be the biggest in recent decades.”

Intuitively, one would think that falling house prices would be good for our first home buyers.

However, the crunch is affordability.

As the cost of money has increased, mortgage servicing costs go up. Currently, the rises and increased costs are greater than the offsetting decline in housing prices. That is, housing affordability is still going backwards and you can bet that will continue to drive prices lower.

As a consequence, in January 2023, the decline in the proportion of loans taken out by first home buyers was down to 16.6% from the peak of 26.1% in December 2020. The bad news gets worse if we consider that housing our desperately needed new migrants involves them being first home buyers too. Coming to Australia is expensive business!

Refinancing for all loans was $18.6 billion in January, still very strong historically and down from the current record of $19.3 billion in November 2022. This is the “mortgage cliff” that policy makers have been concerned about, as 2-3 year fixed price low interest loans written during COVID are now expiring. Mortgage brokers cannot work fast enough as households scramble to protect their hard won assets and the roof over their heads.

The scale of refinancing activity can be seen in a recent survey by the Australian Bankers’ Association. The survey indicates 70% of bank customers whose fixed mortgage rates expired in the past six months have refinanced with another bank. We can see that uptick in the graph above.

However, as reported by James Eyers, in the Australian Financial Review, banks are of the view that this will be manageable for the system. As Eyers wrote:

“…suggesting the $350 billion that will roll off fixed rate loans this year, and a similar number in 2024, will happen progressively and not all at once.”

More importantly, the article goes onto to say:

“The banks are not anticipating any wave of defaults with customers facing higher mortgage repayments changing their spending patterns, applying their accumulated savings to their higher repayments in anticipation of higher borrowing rates or refinancing their mortgage.”

That is good news, if that is how it pans out.


Posted Date: March 30, 2023

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