The year 2022 has been turbulent in the property market. Interest rates have soared to a level not seen in the past 10 years. Home prices are falling sharply to record lows. CoreLogic’s annual Best of the Best report stated that successive interest rate rises, surging inflation, poor consumer sentiment and deteriorating affordability caused a decline in Australia’s 2022 housing market performance.
The Reserve Bank of Australia (RBA) is expected to keep up the cash rate hikes until it puts a lid on persistently high and rising inflation. But economists are arguing that the central bank has already stepped into dangerous territory that could plunge the economy into recession. Here, we provide a summary of the property market in 2022, and trends to watch for in 2023:
2022 Cash Rate Hikes
The following chart shows a timeline of cash rate hikes this year, from the first hike in May.
|Month||Pace Of Cash Rate Hikes||Cash Rate Target|
Repayments On Rise
Let’s take a look at how the consecutive cash rate hikes have increased borrower’s monthly repayments. The following chart compares monthly repayments before the first rate hike, in May, and after the most recent hike, in December. (These example loan repayments were determined using our repayment calculator, based on the lowest variable rate we can offer over a 30-year term, as of December 2022. Rates are subject to change from this date.)
|Loan Amount||Monthly Repayment Before The First Hike, April 2022 (1.89%)||Monthly Repayment After Recent Hike, December 2022 (4.39%)||Difference|
Note: The 4.39% rate is based on the lowest available from our panel of lenders as of 20 December 2022.
Refinancing has hit record highs as interest rates have jumped and people have looked to obtain a lower home loan interest rate. The latest Australian Bureau Of Statistics (ABS) figures show external refinancing hit a record high of $18.1 billion in June 2022. Monthly owner-occupier refinancing between lenders has remained above $12 billion since June, well above pre-pandemic values. Investors’ refinancing activity has also remained high.
Due to this surge, lenders are trying their best to retain existing customers by offering discounted interest rates, quick approvals or cashbacks.
Let’s see how one of our clients, who was worried due to interest rate hikes, refinanced with us and saved large amounts of money.
Arthur, a 38-year-old bachelor, is a professional in the medical industry. He lives with his parents. He has been in this full-time job for 11 years and three months and has a gross annual income of $200,000.
Arthur has bought an investment property worth $1.2 million with a mortgage of almost $1 million from a non-bank lender; he is making repayments at an interest rate of 6.59% a year. He has been worried about rising interest rates and struggling to make monthly repayments. Now, he wants to refinance his current loan and save some money by reducing the amount he pays in interest and fees. He was looking for some mortgage brokers who could understand his situation and help him fulfil his objectives.
He found Home Loan Experts and reached out to enquire about refinancing. He was connected to Rojan Paudel, a Home Loan Experts specialist mortgage broker who is known for finding the best solutions for clients. Rojan was able to find ways to help Arthur secure a loan from a bank. Rojan:
- Noticed the client’s strength as an applicant; he has a stable income and his ability to repay the loan is evident
- Convinced the bank to include his overtime income for servicing by providing payslips as evidence
- Made sure Arthur’s rental income was included for servicing to convince the lender that he is a low-risk borrower
- Recommended that Arthur clear some of his personal debt and close some credit cards prior to formal approval, as this would help increase his borrowing capacity
- Identified lenders who would be happy to approve Arthur’s loan
The Happy Ending
After all this work, Arthur was unconditionally approved for an almost $1 million investment loan at 4.41% a year, for a 30-year term. His new monthly repayments were almost $1,500 less. Now, he can make the monthly repayments without worrying much about the rate hikes.
We can help you, too!
Arthur is one of our many happy clients and you can be, too. Discuss your financial situation with Home Loan Experts specialist mortgage brokers and they will help you to find the perfect solution, based on your objectives and requirements. Call us on 1300 889 743 or fill in our free online assessment form for expert advice.
Falling Property Values
The following chart compares the rate of housing value decline during the first month of rate hikes (May) and during the second most recent month (November). It also shows the total decline from recent peak values.
|Change in dwelling values|
|–||May 2022||November 2022||Decline from peak|
Source: CoreLogic (30 November 2022)
CoreLogic recorded this year’s first national monthly fall in housing values, by 0.1%, in May. It then accelerated to a 1.6% fall in August, the largest month-on-month decline since 1983. Although values continue to trend lower, the rate of decline eased to -1.4%, -1.2% and -1.0% in September, October and November, respectively. November was the seventh consecutive month of decline; the streak reached eight in December. Since the first interest rate rise, national dwelling values have fallen by 7.0%, overtaking the 2008-09 downturn. The driving force behind this was the rising interest rates, as they not only limited borrowing power but also dissuaded potential buyers from borrowing altogether, leading to less competition in the housing market.
In rental markets, vacancy rates are holding at around 1% or lower in most regions. With such tight rental conditions, annual growth in rent values re-accelerated to 10.2% in the year to November. The combination of rising rents and falling dwelling values has caused gross rental yields to keep rising rapidly. National gross rental yield stood at 3.71% in November, up from a recent low of 3.2% in January 2022.
The country’s property market downfall in 2022 was guided by some distinct factors. We saw sharper declines in expensive markets and greater resilience in affordable housing markets. The pace of decline has been easing since September and it could re-accelerate in 2023, if the interest rates surge. Interest rates that now sit between 5% and 6% are expected to increase by 75 basis points, if experts’ predictions of the cash rate reaching 3.85% by the middle of 2023 come true.
Market Outlook 2023
The RBA’s monetary policy decisions, migration and rental trends will all influence the trend of housing markets in 2023.
How High Will Interest Rates Go?
RBA governor Dr Philip Lowe warns that a further increase in inflation is expected in the months ahead. However, sustained decline in inflation is expected before the end of 2023.
Home Loan Experts Founder Otto Dargan says, “When banks assess someone’s borrowing power, they assume rates will increase by up to 3% and factor that in. This year, interest rates have risen by 3%, so if the RBA increases rates any more next year, then many people who purchased homes between 2020 and July 2022 may struggle to make their repayments. Some banks, such as Westpac, are expecting the RBA cash rate to reach as high as 3.8%. If they are right, then that would mean many people would be unable to make their repayments.”
He further states that the central bank could go either way – accept higher inflation than it normally would or accept more mortgage stress. The RBA knows any further rate increases will cause a lot of mortgage stress, so it’s likely to be cautious and watch the data that comes out between now and its next meeting, in February.
Home Loan Experts CEO Alan Hemmings adds, “What may slow further cash rate rises, over the next 12 months, approximately, is that 30% of outstanding mortgages on cheap fixed rates are due to move to variable rates. Approximately $270 billion in mortgages are expected to see interest rate increases of 3%, this will place additional pressure on households and may help to curb inflation.”
Most economists are predicting interest rates to reach their peak in the year ahead. Senior economists from big four banks have offered predictions as to how high rates will go:
ANZ: Cash rate will go as high as 3.85% by May 2023 with a series of 25-basis-point hikes each month.
CommBank: Cash rate will rise to a peak of 3.35% by February 2023, when it will potentially pause.
NAB: Cash rate will rise to a high of 3.60% by March 2023 and remain stable for the rest of the year, before lowering again by March 2024.
Westpac: Cash rate will rise to a level of 3.85% by 2023 with a potential to decline by 2024.
At the end of 2022, the cash rate sits at 3.10%.
Will House Prices Drop In 2023?
The direction of house prices is closely linked to cash rate movements and the instability that comes with them. The chance of the RBA cutting the cash rate as early as next year is extremely small, with Lowe already hinting that further rate rises are necessary. This means further price falls are assured until the middle of next year. The RBA’s internal documents showed that national house prices may drop by 11% by the end of 2023. Prices could even fall 20% from their peaks if people become more hesitant due to rising interest rates and falling prices.
Dargan stated that several economists expect houses in Sydney and Melbourne to fall more than in other markets. This would also make them likely to stop falling before others. Apartments are likely to fall less or be stable, as they did not rise in value as much during the pandemic and they are more affordable already.
Will The Slowdown In The Pace Of Decline Continue?
The national rate of decline in housing values eased towards the end of the year, shrinking from its August peak of 1.6% to just 1.0% in November. While the decline has been slowing, there is still the risk of a downward spiral in the market because:
- Further increases in interest rates or an unwinding in the labour market outlook could re-accelerate this trend.
- The end of 66% of the low fixed-rate terms in the market by the end of 2023 may lead to more motivated selling, causing further downward pressure on prices. As homeowners move from cheap fixed rates in the 2% range to variable rates between 5% and 6%, the slide in prices should accelerate.
Is A Housing Market Crash Ahead Of Us?
A housing market crash is unlikely. For a property market to crash, there must be a large number of owners willing to sell their properties at major discounts and nobody on the other side of the transaction to purchase them. Most economists believe it’s not going to happen because:
- There are many factors other than interest rates that affect home prices; for example, household income, unemployment, international migration and financial conditions. All these factors are strong.
- The housing market as a whole is showing no sign of distress, which means most sellers are not being forced into sales at a loss.
- The RBA and the banks don’t want to see a housing market crash and they would rather support mortgage holders than take over their homes.
These factors suggest that, while property price recovery might take some time, a crash ahead is unlikely.
Potential Trends In 2023
First-Home Buyer Opportunities And Challenges
A recession or downtown in the property market can be a good time for people to get onto the property ladder. The uncertainty causes many other buyers to stay out, reducing competition, and prices can be at their low point. A large number of first-home buyers may enter the market in 2023, especially with rental vacancies low and rents high. Some reports state that the initial fear of buying in a downturn is starting to wane, with some buyers hoping to take advantage of the slow market.
Most first-home buyers will need to compromise, however, and buy a smaller property because their borrowing power is lower than it was in early 2022. So the first-home buyers with high incomes and stable jobs are in the best position to benefit in 2023.
Note: It’s important to consider the stability of your employment, as most economists are predicting a relatively small increase in unemployment. Talking to your employer about their future plans is a good step before you consider buying a property in an uncertain market.
The Return of Investors
CoreLogic data showed diminishing investor interest in the housing market in 2022. Lending for the purchase of investment property fell by 20.2% between April and October, a steeper decline than in owner-occupier lending over the same period.
As rents are rising rapidly and house prices are approaching their low point, many investors are preparing to buy in 2023. The good news for potential investors is that gross rental yields recovered sharply over the year. The national figure rose from 3.21% in February to 3.71% in November, which presents investors with an opportunity to take advantage of falling values, increasing rents and capital gains. It is a good time for long-term investors, provided they have a high income.
Should I Buy A Home In 2023?
The best time to buy a home is always subjective – it depends on your circumstances. Each city will reach a low point in prices at a different time, so it’s important to watch your local market to know when it’s best to buy. Even though property prices are falling now, buying sooner is better if you can afford to do so.
If you keep waiting for the right time to buy, you could:
- Lose the opportunity of buying your dream house
- Miss taking advantage of the falling property market
- Be priced out of properties in the near future that you can afford now.
Are you still sceptical about where the property market is heading in 2023? Home Loan Experts’ mortgage brokers will help you make the right decisions. Call us on 1300 889 743 or enquire online for free today.