In this last residential property newsletter we are going to discuss purchasing power.
Purchasing power in the context of property often relates to how much someone can borrow to buy something.
Over the past year or so with 13 interest rate increases the average borrowers purchasing power has decreased by around 30%.
Purchasing power is directly correlated to borrowing power, which is directly influenced by interest rates.
Higher rates mean lower borrowing power, means lower purchasing power.
Banks will take the actual home loan rate, let's say 5.5%, and for compliance reasons add on top a "buffer" of 3% to that rate and test if your income can still service the loan amount you are applying for.
That means your income needs to support a loan interest rate of say 8.5%.
Because of that peoples borrowing power, and therefore purchasing power has been drastically eroded.
For example, if a year ago you could borrow $2M, now you might be only able to borrow $1.5M. If that.
Assuming an 80% LVR on those loan amounts, the house or property you were looking at in terms of listing price has plummeted from $2.4M to $1.9M. That is a loss in purchasing power of $500k.
$500k is a big difference in the type, location, size, quality and style of property you might have otherwise bought a year ago.
One historical data point to consider is that when home loan rates were around 2.5% during the pandemic fuelled, or more accurately cheap money fuelled, housing boom of 2020 and 2021, the buffer rate was about 5.5%. This is the current home loan rates in the market, meaning that
The biggest implication of this, in my view, is that if a seller must or wants to sell, whether that is to take profits or because they have to sell because of debt, divorce, or death (the 'Three D's known in property circles for the main reasons people sell property), then they have to meet the market.
If a seller is going to meet the market it will be lower than it would have been a year ago.
Because of the reduction in purchasing power.
There will always be cashed up buyers who are not in this position, but generally speaking, this is a fairly common situation.
As people sell, they need to sell at the market clearing price. What someone is willing and able to buy it for.
What they can buy it for, most of the time, depends on how much they can borrow.
They can borrow less, so the seller will get less.
This is downward pressure on property prices, and I believe it will result in lower prices for property in 2024.
. . . . .
Friendly reminder not to leave your Christmas shopping too late! As we approach the end of the year, here’s what’s happening in the home loans and property markets:
Home loans activity rises
Fixed-rate transition continues
Property market keeps growing
Bank funding costs increase
Read more below.
There's been a big rise in home loans activity over the course of the year, with investors leading the way. Between February and September, the total volume of mortgage commitments rose 9.5% to $25.0 billion, according to the latest data from the Australian Bureau of Statistics. Owner-occupied borrowing climbed 6.1% to $16.1 billion, while investor borrowing jumped 16.0% to $9.0 billion.
Three other key facts:
The number of loans taken out by owner-occupier first home buyers increased significantly between February and September, rising 18.4% to 9,213 loans.
Refinancing with external lenders fell 7.1% to $18.5 billion, although that figure was still well above the long-term average.
Borrowing for alterations, additions and repairs increased 9.4% to $502 million.
I love helping all kinds of borrowers, from first home buyers and investors to renovators and refinancers. Reach out if you need assistance. Need help? Request a call back
The great transition of the mortgage market, from having a heavy share of fixed-rate loans to now being dominated by variable-rate loans, has gathered pace, according to Reserve Bank data. During 2020 and 2021, when interest rates fell to record-low levels, enormous numbers of borrowers took out two-year and three-year fixed loans at very low interest rates. Many of those loans then expired as rates started rising, meaning that many borrowers have been reverting from ultra-low fixed rates to significantly higher variable rates.
“The fixed-rate share of total outstanding housing credit declined to 22% in September, well below its peak of just under 40% at the start of 2022,” the Reserve Bank reported in its recent Statement of Monetary Policy. Over recent months, the number of fixed loans that have expired have outweighed the number of new fixed loans that have been initiated, by a ratio of more than five to one. “Most of the remaining fixed-rate loans are expected to expire by the end of 2024,” according to the Reserve Bank. Reach out if you want to refinance
A new report from CoreLogic has found that median property prices increased in 82.4% of local markets in the three months to October, based on a sample of 4,506 suburbs across Australia.
That included price increases in 83.1% of house markets and 80.6% of unit markets.
Focusing just on house markets, prices increased in:
Perth - 99.7% of suburbs
Adelaide - 99.0%
Brisbane - 98.7%
Sydney - 91.4%
Melbourne - 80.8%
Canberra - 71.1%
Hobart - 59.1%
Darwin - 59.1%
CoreLogic's head of research, Eliza Owen, said many housing markets across the country were growing, despite high interest rates and weakening economic conditions. “It’s often noted that Australia is not ‘one housing market’ and we’re currently seeing increased diversity in capital city market performance,” she said. “That’s reflected in city-wide growth rates, the various levels of supply that’s available in some cities over others, and it’s reflected in the different suburbs we analyse in this report.”
While interest rates have increased significantly over the past 18 months, this increase, thankfully, has been less than one might have expected, due to competition, according to the Reserve Bank. Between April 2022 and September 2023, the cash rate increased by 4.00 percentage points. However, banks increased their variable rates by, on average, only 3.32 points for owner-occupiers and 3.28 points for investors. This was due, in part, to “the effect of competition between lenders on variable-rate housing loans”.
Meanwhile, banks’ funding costs increased further between the June and September quarters, which is likely to lead to higher interest rates and more pain for households. The increase in funding costs came “as banks replaced maturing bonds issued at much lower rates and average deposit rates increased”. Banks generally ‘buy’ funding on the wholesale market, add a margin and then on-sell this money to borrowers in the form of home loans (and other loans). So when banks' funding costs increase, they generally have little option but to increase rates as well.