Property puzzle more convoluted as Reserve Bank keeps rates on hold

Published: 07 February 2017

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The Reserve Bank of Australia has kept the cash rate steady, maintaining the record-low rate of 1.5 percent it established in August last year.

However, that doesn’t necessarily mean your mortgage rate will stay the same – the Big Banks are now increasing rates at will, trying to safeguard their own houses against a ‘number of domestic and international factors.’

Market experts widely predicted the rate would hold when the RBA held its first meeting of 2017, citing ongoing low inflation and a contracting GDP, as well as a relatively strengthening housing market.

A small rate increase is predicted for later in the year.

So what does this mean for the average family struggling to paying their mortgage, looking to sell, or looking to enter the market for the first time?

Mortgage Choice CEO John Flavell believes today’s RBA decision will have little effect at all, nor will a potential future rate hike, and predicts Sydney’s property market will continue to grow by a modest 4-5 percent over the next 12 months. 

While some have predicted an inevitable market collapse, particularly as property prices have doubled in Sydney and Melbourne since 2009 and that rate of growth is likely not sustainable, Mr Flavell thinks a “crash” scenario would be incredible unlikely.

“Underlying cost is due to supply and demand,” he said. “In Australia, in Sydney, people seek to move into major urban centres where there is employment and education,” he said, adding that continued urbanisation would drive demand.

He said for a collapse to take place, there would need to be an “incredible increase in supply in property,” and for “demand to dry up.” There would need to be a “spike of cost of finance,” and “an incredible spike in unemployment.”

He said there is no indication this ‘perfect storm’ of criteria is set to take place, especially given the continued steady growth of Australia’s population, and the continued urbanisation of our largest cities “with no sign of abating soon.” 

He said the market has also adjusted itself, as apartment stock has gotten “a little bit ahead of demand” but the number of new building approvals has steadily come down from October and November last year, stabilising prices.

He also added that in Sydney and across the country, “we’ve found more than half of all properties are owned without a mortgage at all.”

Contrary to popular opinion, those who do have mortgages, he said, are not over-extending themselves, and the “vast majority” are ahead of their loans, to the tune of “seven to eight months’ payments ahead.”

Even with a lending buffer of 2 to 2.5 percent, mortgage holders are still “well positioned to meet debt obligations.”

Despite the cost of properties going up, he attributes families’ ability to comfortably pay their mortgage debt to the cash rate being steadily and significantly lowered from pre-GFC days.

“We’ve found as the cash rate and interest rates come down, people have maintained paying off loans at an accelerated rate.  Most people are putting in extra to pay off their loans faster.”

But not everyone shares the same sunny outlook. Speaking to News Corp, Digital Finance Analytics principal Martin North maintains that when rates do eventually rise, mortgage stress will be a likely scenario in countless homes, as wage growth has not kept pace with the bumper prices in the property market.

“They have paid top dollar, they have big mortgages and a stagnant income and therefore there could be pain ahead if interest rates rise,” he said.

The average Sydney homebuyer currently spends 44.5 percent of their income on their mortgage, a figure that could exceed 50 percent by the end of this year – so anyone in the market has to be committed to the prize.

There will always be confusion whether to buy or sell… remember, some experts warned against buying five years ago, when house prices were half the price!