Record-low fixed rate loans could be on the outer, with a significant number of Australian banks hiking rates on four-year fixed terms over the past month.
Research by RateCity.com.au showed 14 lenders had increased their four-year fixed rates, following the lead of the Commonwealth Bank of Australia, which increased its rates for four-year fixed terms last month.
RateCity research director Sally Tindall said the movement by the banks was in anticipation of a likely official cash rate increase in early 2024, if not before.
“So far Australia’s second largest bank, Westpac, has kept its four-year fixed loan at a record low of 1.89 per cent, but it’s hard to see this rate sticking around for long,” Ms Tindall said.
“The idea of paying under 2 per cent interest until 2025 is an incredibly attractive proposition for many homeowners, but that doesn’t automatically make it a good idea. Take the time to work out what type of loan suits your finances.
“Fixed loans come with extra restrictions such as caps on extra repayments, typically no offset account and break fees if you want to get out early.”
Ms Tindall said another option would be to split a home loan so it is part fixed and part variable, which typically allows for extra repayments on the variable portion.
“A split loan can help you take advantage of the record low fixed rates on offer now, but still allow you to get ahead on your repayments to lessen the blow when rates do rise,” Ms Tindall said.
“Money might be cheap now but in a few years’ time it’s likely to be a very different story, provided the economic recovery stays on track, particularly for anyone coming off a fixed rate.”
Earlier this week, ANZ cut its variable package rates, making the first reduction for variable rate loans by a big four bank since September.
Canstar group executive of financial services Steve Mickenbecker said the decrease was being passed on to new borrowers by way of increasing a discount applied to its standard variable rate loan, which would not be passed on to existing borrowers.
“ANZ now offers the lowest package rate among the major banks and it would not be surprising to see others moving down the same path,” Mr Mickenbecker said.
“ANZ is seeking to grow its share of low risk business, with the gap between lending to borrowers with equity below 20 percent and those with greater equity widening from 5 to 20 basis points.”
The pace of capital gains across Australian housing markets has been close to record breaking, with the national growth rate in March the fastest since 1988.
Such exuberant conditions have been driven by a multitude of factors including record low mortgage rates, a stunning surge in consumer confidence as the economic recovery beats expectations, a range of additional stimulus measures which have incentivised home buying and building, and persistently low advertised inventory levels which has created a renewed sense of FOMO amongst buyers.
But… there are some early signs the exuberance in the housing market may be peaking. This isn’t to say housing values are about reverse; a more likely scenario is the housing market is moving through a peak rate of growth and the pace of capital gains will gradually taper over coming months.
CoreLogic’s home value index is already indicating a slowdown in the pace of capital gain
Clearance rates have also edged lower, with the Easter period marking a subtle softening in auction results. The weighted average clearance rate moved through a recent high in the last week of March at 83.1%, and has since drifted lower to reach 78.6% over the week ending April 18th. Historically there has been a strong positive correlation between auction clearance rates and the pace of appreciation in housing values.
Recently there has also been a marked lift in new listings coming to the market relative to prior years as more vendors take advantage of the strong selling conditions. The four weeks ending April 18th saw 26,470 newly advertised capital city properties added to the market which was the largest number of new listings for this time of the year since 2016 and 17% above the five year average. Total advertised stock levels (ie new listings plus re-listings) remain low, tracking -17.5% below the five year average, which implies buyers are still likely to feel some urgency, but the lift in stock additions should gradually support a rebalancing between buyers and sellers, especially if buyer activity slows as new supply levels lift.
Along with more new advertised stock coming on the market, there has also been a significant lift in housing construction activity that will gradually add to overall supply levels. Approvals for new dwelling construction are at record highs, and dwelling commencements over the December quarter were almost 20% higher than a year earlier and 5.5% above the decade average. The surge in new building activity is skewed towards houses rather than units, however the larger cities are still showing a unit supply overhang, with 46,166 units under construction across NSW over the December quarter last year and 43,032 under construction in Victoria. The unprecedented pipeline of new housing supply will take some time to work through to completions, however it is occurring at a time when demand from population growth has recently turned negative which could progressively create an imbalance between demand and supply.
The lift in new home building will gradually add to overall housing supply levels at a time when population growth, which is an important component of housing demand, has turned negative for the first time since 1916 due to closed borders and stalled overseas migration. The timing of a return to higher housing demand via population growth remains uncertain until international travel and migration resumes. Stalled migration has had a more direct and immediate impact on rental markets, due to the fact that around 70% of Australia’s overseas migrants arrive on a temporary basis. Of the roughly 30% of migrants that arrive in Australia with permanent intentions, most would rent before buying, so the impact on buying demand is more gradual.
Less incentives
Further to the demand side, Australia is moving into a new phase of the economic recovery where there is substantially less fiscal support which could result in a reduction of housing market activity. Arguably, housing demand has been brought forward by incentives such as the HomeBuilder grant and income support as well as state based initiatives such as stamp duty concessions. As these stimulus measures expire, along with less migration and rising affordability constraints, it’s reasonable to expect housing demand could be negatively impacted.
Higher barriers to entry
Another barrier to a further acceleration in rising housing prices is affordability. For those that already own a home, servicing the debt is generally straight forward thanks to record low mortgage rates. However, for those looking to enter the market, growth in housing values is substantially outpacing incomes, which means a growing deposit hurdle for first home buyers. Based on data to September 2020 (which would have worsened by now considering the 8.2% lift in national housing values since then) it would take the typical Australian household 8.6 years to save a 20% deposit (assuming a household can save 15% of their gross annual income), with households in the most expensive capitals, Sydney and Melbourne, taking a longer 11.4 and 9.8 years to save a deposit.
Although it’s likely the pace of capital gains has peaked, there remains a variety of factors that are likely to keep upwards pressure on housing values.
Additionally, the rapid economic recovery trend and low interest rates are likely to keep consumer spirits high for a prolonged period of time. The correlation between sentiment and housing activity is high; as long as consumers remain in a buoyant mindset we should continue to see housing activity holding up.
Eventually, international borders will re-open, helping to support housing demand as overseas migration recovers. As mentioned earlier, open borders are likely to have a more direct and immediate positive effect on rental demand, which should gradually flow through to purchasing demand from permanent migrants.
Overall, we are expecting housing values to continue to rise throughout 2021 and most likely throughout 2022, just not at the unsustainable pace of growth that has been evident over recent months.
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