Home Loan Profits In Sydney: Tips For Smart Borrowing

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Home Loan Profits In Sydney: Tips For Smart Borrowing

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The housing market is changing. Everyone knows prices fall when interest rates rise, but the composition of the market also changes dramatically, and if you own – or want to own – property, it’s important to understand how the pieces fit together to make the whole.

Forensic examination of the housing market allows us to understand how it works and gives the best information about what will happen in the last quarter of 2022 – the spring selling season – and 2023, when interest rates are predicted to finally peak .

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Let’s start with the prices. They fell, but not everywhere to the same extent. Prices fell first in Sydney, followed by Melbourne, and as the following chart shows, these cities saw the biggest drop. This mirrors the patterns of home price correction in 2017, when those markets first fell and first recovered.

In the two major capitals, prices fell first in the most expensive suburbs. In those suburbs, houses are mainly converted. At the same time, the prices of newly built houses are rising due to rising input costs and lack of spare capacity among builders.

So why are Melbourne and Sydney the first to fall? The answer is that loans are higher in these two capitals. As the following chart shows, the average new home loan in Sydney and Melbourne is huge:

As interest rates rise, larger loans become more expensive to service. This is important because the difference in average loan size is greater than the difference in income between states in Australia. In NSW, people are more stuck with their mortgages and are therefore more affected by rising interest rates.

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The increase in interest rates clearly affects the appetite for loans. What types of loans are most popular?

As the following chart shows, investors and owners can sometimes be very different. For example, in 2021 investors increased their market share as owners decreased. But with rates rising faster than expected in 2022, both investors and entrepreneurs are taking on fewer and fewer new loans. The decline in owner-occupier loans follows unprecedented growth in 2020, so there are still buyers after several months of contraction.

First home buyers are joining the rush to get out after enjoying a strong pandemic of many people moving into their first home. The volume of loans to first home buyers quickly fell back to pre-pandemic levels.

So what’s next for the property market? If the forecasts from Australia’s big banks are anything to go by, the market still has some way to go. Their home price projections lead to a 15-20% drop, and the time frame they expect this to manifest is 6-18 months from now.

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Predictions can be wrong. Perhaps the wisdom of the crowd, but it is best to guess what interest rates will do through market expectations. However, the market expects official interest rates to rise to around 3.5% in 2023, with no stabilization or slight reduction. This would be another big increase in official rates compared to our 2.4%. But of course, official interest rates and what people pay for mortgages can vary widely.

As you can see from the following chart, there is a group of Australians who are not greatly affected by the rise in interest rates. They are the ones who will take out fixed interest loans in 2021. When the RBA raises the rate, they feel nothing. Then there are those who take loans with a fixed interest rate. Some of them included new high rates. Then there are people on new variable rate loans: they pay more than on fixed rate loans, but less than the luckiest group: people with older loans. The average interest rate on outstanding loans is still higher than the average interest rate on new loans. That’s why you should always think about refinancing: banks profit by inertia.

When the RBA raises interest rates, it is trying to prevent inflation. The mechanism is indirect: by directing household spending toward mortgage payments and reducing household wealth through falling house prices, the central bank hopes to reduce household spending on goods and services. The reduction is intended to balance supply and demand so that businesses feel less need to raise prices. (Monetary policy has other ways of affecting household savings, the exchange rate and business spending, but these are less relevant now).

Of the two main effects described above, lower house prices are already happening. But the shift in household spending to paying off mortgages is slower. Even for households with variable interest rates, there is a backlog. Commonwealth Bank analysis shows it takes two or three months for an official rate hike to affect household mortgage repayments.

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In normal times these relatively small delays do not matter. But when the RBA rises by a full two percentage points in 91 days (from 0.35% on June 8 to 2.35% on September 7), it means they pump more hoses into the economy before the water has a chance to rotate properly. extinguish the flame. The RBA has announced that its action will be based on the data it receives, but that data comes with a long delay and the bank is acting boldly before the full impact of its actions is known.

The governor of RRA also spoke about this when he described the road “clouded by uncertainty”. Maybe they haven’t done enough yet. Maybe they did too much. We cannot know.

Following the evolution of household consumption is currently an adrenaline rush. ANZ Bank produces a range of daily charges and is yet to show a drop. But consumer confidence is in a deep recession. One of the two loops must be bent, and much depends on which one it will be. If consumer spending falls, the RBA may end interest rate hikes early. If not, the bank may have to raise rates further, with all the consequences that would have on house prices.

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Jason Murphy is one

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