The cliff is nigh - or is it?

For months we have been hearing about the so-called mortgage cliff materialising in the last few months of this year. Thousands of mortgage holders transitioning from the cosy fixed interest rate they have been on (mostly secured between mid-2020 and mid-2022) to a potentially problematic variable rate.

So as we approach that time, what can we expect from the real estate market?

Recent data is showing that higher mortgage rates are already having an impact, with the economy recording a slowdown in activity while housing market momentum has been decelerating.

Fixed rate lending early on in the pandemic peaked in July and August of 2021. The majority of fixed rate loans are taken out with a term of three years or less, so the biggest number were expected to expire this year (880,000), followed by another 450,000 next year.

The risk, of course, is the sudden surge in fixed-rate loan expiries and that some borrowers will inevitably struggle to service their loans on the new, higher, variable rates. However, looking at overall lending, the uptake of fixed-rate borrowing through COVID still only accounted for about 40% of outstanding housing credit in early 2022. The vast majority of mortgage holders are, and have been, on variable rates and have had time to adapt to the changing conditions more gently. In fact, official data suggests arrears remain in check and are still below pre-pandemic levels.

Following a strong start at the beginning of this year, house prices have weakened and auction clearance rates have declined. At the same time, we are now seeing an increase in new listings coming to market. The significance of this data is that it goes against trend, where listing numbers usually drop during the winter months.

This could indicate a few things:

• Mortgage holders are anticipating financial stress - if they haven’t experienced it already.

• Property owners are trying to speculate on the market for financial advantage.

• Prospective sellers are trying to beat the influx of properties expected during the spring selling season.

There are also homeowners who put their selling plans on hold during last year’s lacklustre spring selling season, who have been inspired by the bullish prices of March, April, May this year to make the move. The trouble with this cohort is that if they have waited until now to start the process they may be disappointed when buyer interest comes in below expectation as prices have started to ease.

So, the current rise in listing numbers isn’t necessarily a sign that higher mortgage costs are creating forced selling conditions.

Now, back to the cliff. Will the drop be swift and reach terminal velocity or more like a gentle roll down the hill?

It appears that mortgage stress has not seen a blow out in arrears amid the expiry of low fixed-term loans. As home values rise, the risk of default also remains low. However, if the RBA increase rates again and new listing numbers continue to rise then it could be a vastly different story.