Property Finance Update - Jan 23
Happy new year! I hope you had a fun, relaxing break. In this first newsletter of the year there are four property and finance stories to welcome you back. Before that I would like to point out the decline is residential property prices continues as a result of the RBA increasing interest rates which smashed asset prices because it reduces peoples borrowing power, and we have not seen the bottom. The reason borrowing power matters to property prices is that a house will only sell for what some is willing and able to pay for it. Consider an auction, if you can borrow $1.5M you can keep bidding up the price to that point. If you can only borrow $1.2M you tap out on what you can offer much sooner, therefore if the property sells it likely sells at a lower price to match how much someone can offer. Coincidently that reduction in borrowing power in that example of 20% correlates to the overall market possible peak to trough decline. During this year many people will see their low circa 2% fixed mortgage rates expire and come to see their interest rate now sitting at 5% - 6%, a shock to the household budget, and the property market. Once this starts occurring it is likely that the velocity of the declines will not abate, pushing towards the 20% total market decline we have discussed previously. However there are good buying opportunities as prices ease and many options from banks and non-bank lenders to suit any circumstance. If you are considering buying or want to refinance let's talk. Stories below:
Borrowers set refinancing record
Rents rose 10.2% last year
Home building price relief in sight
RBA expects inflation to fall in 2023
Read more below.
Refinancing activity is at ultra-high levels right now, as owner-occupiers and investors alike try to find home loans with lower interest rates as the Reserve Bank continues to raise the cash rate. Borrowers refinanced a record $19.5 billion of loans in November, the most recent month for which we have data, according to the Reserve Bank of Australia. By way of comparison, that was 20.4% higher than the year before and 88.2% higher than two years before.
The Reserve Bank has hinted that at least one more rate rise is coming. In December, it said it wanted to "return inflation to the 2-3% target range over time" (it's currently 7.3%) and would “do what is necessary to achieve that outcome" – i.e. further increase the cash rate. So if it’s been a while since you took out your home loan, now would be a good time to think about refinancing. Contact me to get the ball rolling. I’ll be happy to crunch the numbers for you, so you can see if refinancing would be suitable for you and how much money you could save by switching to a comparable lower-rate loan. Want to compare interest rates? Let's talk
Many property investors enjoyed a big rise in their rental income during 2022. CoreLogic has reported that the median rent for an Australia investment property increased 10.2% during the year. The city-by-city breakdown was:
During 2022, the national vacancy rate fell from 2.1% to 1.2%. To put it another way, the number of untenanted rental properties fell from 21 per 1000 to a very low 12. That forced tenants to compete harder, pushing up rents.
"Rents are still rising in most capital cities and regional areas, with vacancy rates low," according to CoreLogic head of research Eliza Owen. Between September 2020 (when this period of rental increases began) and December 2022, Australian rental rates increased 22.2% – the largest increase in a 27-month period in recorded history. Get in touch if you need an investment loan
Home building costs continue to rise sharply, but it appears the worst is behind us. Residential construction costs rose 11.9% during 2022, after climbing 7.3% in 2021, according to CoreLogic’s Cordell Construction Cost Index (CCCI). The 2022 result was the largest annual increase on record, apart from the period impacted by the introduction of the GST. However, the pace of growth appears to be slowing: prices increased 4.7% in the September quarter, but only 1.9% in the December quarter. CoreLogic construction cost estimation manager John Bennett said, in 2023, costs would be unlikely to rise at the same rapid pace as in the recent past, because rising interest rates and inflation have made consumers, builders and suppliers more cautious. Analysing the price increases, Mr Bennett said:
Volatile timber prices are affecting the cost of structural timber and general timber products
Prices continue to increase for metal products, such as gutters, lintels and fixings, which are used for roofing and structural purposes
Petrol price increases are affecting cartage and delivery costs, including for concrete and rainwater tanks
Gravel, aggregates and fill prices have increased, possibly affected by the rise in petrol prices
Costs have also increased for appliances and fittings
While inflation continues to be worryingly high, it may have peaked. The Australian Bureau of Statistics’ latest data show that inflation rose from 6.9% in October to 7.3% in November. In early December, the Reserve Bank of Australia (RBA) forecast that inflation would "peak at around 8%" in December. If that’s the case, inflation may already be cooling – even though the next inflation announcement (of the December result) may show an increase on the previous period. Inflation is expected to decline in 2023 "due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand", according to the RBA, before falling further in 2024, to "a little above 3%". The RBA has said that high inflation "damages our economy and makes life more difficult for people", so it’s determined “to re-establish low inflation and return inflation to the 2-3% range over time".