Avid readers of my newsletters might recall a few pertinent predictions I have made about the property market over the last few years, including in June 2020 saying we would see a property boom, and in November 2021 saying a massive correction will occur once the RBA started moving the cash rate. There are a couple of other predictions I have for the property market in 2023 and 2024 which I want to share with you in this final newsletter of the year. One of the key points I would like to make is that we have not yet seen the bottom. Originally I thought a 20% correction would be on the cards with a RBA cash rate increase to about 1.5%, but now that the cash rate is double that (currently 3.1%) I am concerned the downturn could be even more severe. However, the 'property market' is in fact a dynamic and multi-layered market and aggregating it does not always make sense. For example, prices and the types of products differ by state, as they do capital cities and regional towns, high end expensive homes to low end cheap apartments. So, when we are talking about the property market it is important to recognise how much it can differ depending on our frame of reference. The other key message I have is that the full impact of the unprecedented 300 basis points of increases in the cash rate have not yet washed through the system. It can take months before a cash rate increase changes the monthly mortgage repayment, and even years to be fully priced into other areas of the economy. We do not yet know the damage the cash rate changes have caused. It is a wait and see game. I do know however that people are a lot poorer than they realise. I say this not only because of the purchasing power erosion of money printing but because for many people their disposable income is about to disappear. Just take a look at the RBA's own research below. This shows a staggering 30%+ of mortgage holders will see their 'spare' income collapse between 40% and 100%.
That is just mind blowing.
The RBA is saying here that almost a third of borrowers are going to see half to all of their income disappear.
This is going to mean we see a consumer lead recession that starts in 2023 and goes into 2024.
What do I mean by that?
Well, one persons spending is another persons income.
Consumer spending is business income.
Lower consumer spending means lower business income.
Lower business income means lower GDP.
As peoples income dries up and there is less spending going around, less income, which also means higher unemployment. So as consumption dries up so will economic activity which will print as a technical recession. How deep and bad it will be is yet to be known.
Two final predictions on news headlines you will see a lot about next year.
"Mortgage Prisoners" and 'Negative Equity".
These are going to become unfortunately more common expressions in the lexicon as more people get trapped in their bank or see they equity in their property vanish.
Anyway, I hope you have a wonderful Christmas break. Here are four stories to round out 2022:
Property market update
Refinancing surges
Fixed v variable
Brokers post record result
Read more below.
The property market has changed significantly over the past 12 months.
In the year to November 2021, the national median property price jumped 22.2%, according to CoreLogic. But in the year to November 2022, prices fell 3.2%.
Some capital cities actually recorded price growth in the year to November 2022:
Adelaide +13.4%
Darwin = +5.5%
Perth +3.9%
Brisbane +3.3%
But prices declined in the other capitals:
Canberra -1.3%
Hobart -4.1%
Melbourne -7.0%
Sydney -10.6%
That said, every capital city’s median price declined in the three months to November 2022, suggesting all markets are going backwards right now and will continue to trend downwards in 2023. There is opportunity to buy property in a falling market, especially as your borrowing power is reducing as rates increase, now might be the time. Thinking of buying next year? Let's talk.
The latest data from the Australian Bureau of Statistics has revealed that enormous numbers of borrowers are refinancing their home loans. Australians refinanced $17.8 billion of mortgages in October – not far off the record $18.6 billion of refinancing that occurred in August. Indeed, the past six months have been the six biggest months in refinancing history. Part of the reason so many borrowers are refinancing right now is because many lenders charge lower interest rates to new borrowers than loyal customers, as shown by Reserve Bank data. In October, owner-occupiers who took out new variable loans were charged, on average, 0.51 percentage points less than owner-occupiers with existing loans. Refinancing to a comparable lower-rate loan could potentially save you tens of thousands of dollars over the life of your loan. I’d be happy to explain the pros and cons of refinancing, and to crunch the numbers to see how much you might be able to save by switching loans. Reach out if you want to refinance
Very few borrowers are currently fixing their home loans – unlike a year earlier when about half of borrowers were doing so. In October 2022, the most recent month for which we have data, only 4% of borrowers fixed their loans (both new loans and refinances), according to the Australian Bureau of Statistics. By contrast, 44% of borrowers fixed in October 2021 and 46% in August 2021 (when fixing peaked). While the Reserve Bank only started increasing the cash rate in May 2022, lenders knew it was coming, so they’d already started raising interest rates on their fixed-rate loans. In response, borrowers had begun shifting towards lower-rate variable loans. This is confirmed by Reserve Bank data on new owner-occupied loans.
In October 2021, the average interest rate on a new fixed loan (with a fixed period of three years or less) was 0.63 percentage points lower than a new variable loan. By February 2022, new fixed loans had become 0.09 percentage points dearer; by May they'd become 0.70 percentage points dearer. That has since declined – by October, they were only 0.30 percentage points dearer. Compare fixed and variable interest rates
An ever-growing majority of consumers are taking out home loans via mortgage brokers, rather than going direct-to-lender. Between July and September 2022, mortgage brokers facilitated 71.7% of all new residential home loans – a record share – according to research group Comparator. That compared to 66.9% the year before and 60.1% the year before that.
Anja Pannek, the chief executive of the Mortgage & Finance Association of Australia, which commissioned the research, said the result highlighted the trust and confidence that consumers have in mortgage brokers. "With a backdrop of a rising interest rate environment, and with many borrowers reverting from fixed to variable rates in 2023, mortgage brokers are also well placed to support their clients to understand their options and select the product best suited to them," she said. "This may include negotiating a more competitive rate with their client's current lender or refinancing to a different product that is in their best interests."