Is the cliff looming?

As we enter the halcyon days of a Sydney summer, will the property market upset the applecart?

You don’t have to have been a real estate enthusiast to know that 2022 has been another year of surprise twists and turns. We started 2022 having emerged from a year that claimed the sharpest increase in Sydney property prices on record. Bolstered by record-low interest rates and assurance from the governor of the Reserve Bank of Australia that rates would remain stable for at least another 24 months or so, nothing looked to interrupt the property juggernaut’s trajectory.

But just as we said goodbye to the summer months and began preparing for their antithesis, the unthinkable happened.

In May the RBA announced its first rate hike in over a decade. Inflationary pressures post-pandemic have seen the central bank implement rises each month since, to a total of 2.75 percentage points over what it was in April. As would be expected, the real estate market began to wobble.

The market has weakened in the months since but not by as much as many had predicted. We are currently seeing a flattening of prices rather than a rapid decline, partly due to the reluctance of property owners to sell, thus limiting options for buyers.

Having said that, the impending end of year always brings out a sense of urgency for some and last weekend was the busiest for auctions since late May, when the effect of the rate increase and uncertainty of the future began to kick in.

Looking forward, several factors are at play. It is widely believed that the RBA will apply another rate rise this month – and it is not only more recent mortgagors that are at risk of struggling to service their loan. Those that borrowed post the Banking Royal Commission had a larger buffer factored into their borrowing capacity, designed to absorb fluctuations in rates and ease serviceability pressures. That buffer would have all but been consumed now and with sluggish wage rises during that time, it may prove a tipping point for these borrowers.

In addition to that, many fixed home loan rates will be reverting to variable rates at a significantly higher interest rate than would have been anticipated. This could push some borrowers over the proverbial cliff, resulting in distressed sales and a further weakening of prices.

With mortgage affordability at its worst level since the1990s, this will no doubt start to have wider ramifications on the property market. National average house prices are more than six times the average household income and with the RBA juggling inflation, interest rates, unemployment etc. in an effort to attain financial stability, it is inevitable there will be casualties along the way.

---

Published November 29, 2022

By Belinda Cassano