Housing market and interest rate update

Housing market and interest rate update: Nov 2023

Australian housing market remains resilient

Nationally the Australian housing market remains resilient – with national home values increasing 2.3% in the three months to October, and 5.6% to the year to October, which is the annual highest rate of increase since July 2022. This is after a 9.2% fall from May 2022 to Feb 2023.

The market is remaining resilient due to and ongoing supply and demand mismatch:

Stock still tight: Listings remain 5.4% lower than the 5 year average.
Demand is remaining steady due to lower stock creating some “concentration competition” and a sense of urgency
Record migrant numbers (approx 8000/ week) are driving supply challenges and with tight rental markets some are looking to buy rather than rent.
Australian rent values increased a further 0.7% in October, taking the national annual increase to 8.1%.
Dwelling approvals fell a further 4.6% in September. Both house and unit approvals continue to trend well below decade averages.
The tight employment market is buffeting the risk of existing mortgage holders defaulting.
It was the early 2000’s in the mining boom that we last saw the housing market rise in a rising rate environment like we currently have.

Rate rises

The current interest rate environment is challenging. Australia’s cash rate has risen 13 times from .10% back in April 2022 to 4.35% with the most recent November rate rise.

The RBA recently pausing rate rises it remains steadfast to its inflationary target to ensure inflation does not become entrenched, the likelihood is of more pain before some light on the horizon.

In November the RBA revised its forecasts, CPI inflation is now expected to fall to around 3.5% by the end of 2024 and be “at the top of the target range” by the end of 2025. Previously, the central bank predicted that CPI would fall to 3.3% end of 2024 and 2.8% at end of 2025.

As finance and mortgage brokers we are assisting mortgage holders through this time and wanted to share some guidance and tips for consideration.

For those looking to buy

Depending on individual circumstances, people are borrowing less with the same income.
Borrowing capacity is down some 30%. For example if someone was able to secure $800,000 last year can secure approx $550,000 – $600,000 today.

Investor challenges

Main challenges for investors are the cost to hold a property with inflationary pressures, the cost to fund their current or new property with rising rates and some uncertainty around potential Government intervention into the rental markets, including tax changes and creating rental caps.

Navigating interest rates: The impact on existing mortgage holders

For those on variable rates the cash rate rises have been passed on directly by providers – which along with other cost of living pressures has made many household budgets very tight.
For example, for a borrower with a $500,000 home loan with 25-years remaining, paying 2.19% in April 2022, their current rate would now be 6.54%, and they would be paying and additional $1,200 / month.
For those on fixed rates – a stark increase of 4.25% (at November 2023) is on the horizon when the fixed rate expires – and there have been some 880,000 Australians coming off fixed rates in 2023 and 450,000 in 2024

Navigating interest rates: Guidance for those on a variable rate

If a mortgage holder has not had their bank or mortgage broker review their current rate they are likely paying more interest than they need to be. We have found some variable mortgage holders are paying 50 – 100bp more than they need to be. For example, someone whose rate is 1% above market, with a loan of $500,000 would be paying an additional $5,000/ annum in interest.

What they can do:

Call their bank or request their mortgage broker call their bank and ask for a better rate!
Review this against other providers in the market – it may be a better rate can be secured.
We are finding some banks and providers are offering better “new to bank” rates than “retention rates”. Some providers are also offering cashbacks to cover the associated costs of changing providers.
There is also consideration of fixing – noting fixed rates have been well above the variable rates – with some starting to come back now.

Navigating interest rates: Guidance for those on a fixed rate

Ensure you understand when your fixed rate expires.

Understand as best they can what their rate will be when it goes to variable. Noting the rate will initially go to the banks “revert rate” or “standard variable” rate – some of which will have an even bigger impact than the 4.00% cash rate rises over the past year.

What they can do:

Build their budget based on the new repayments. If possible, start setting aside funds and create a buffer.
When or within a few weeks of it rolling off fixed call their bank or request their mortgage broker to call their bank and ask for a better rate!
Review this rate against other providers in the market – it may be a better rate can be secured.
We are finding some banks and providers are offering better “new to bank” rates than “retention rates”. Some providers are also offering cashbacks to cover the associated costs of changing providers.

Navigating interest rates: How Equilibria Finance is assisting:

We are approaching current provider at no cost to try and secure a better rate for clients.
We review this outcome against the market and if we can secure a better rate elsewhere – and if it makes sense look to undertake a refinance. There are also cashback opportunities available in some cases.

END

This is for general information purposes only and does not constitute advice. With all of these options there are a number of considerations outside the scope of what is covered in this article that you need to understand to ensure your personal circumstances are taken into consideration.

Equilibria Finance is a mortgage broking practice specialising in delivering residential and commercial mortgage and business and asset finance solutions to the clients of financial advice and accounting practices.