Homeowners may have noticed there has been growing discussion that housing prices may fall next year, following a predicted Reserve Bank of Australia-led interest rate hike in 2022. But what could a fall in property prices mean for you?
The cash rate has sat at a record low of 0.10% since November 2020. While RBA governor Philip Lowe may still state they plan to hold off on a cash rate rise until target inflation levels are met, presumed to be around 2024, there has been increased speculation that this may occur much sooner.
However, a recent residential survey has tipped a potential property value drop of 11% for Sydney and Melbourne in 2023, and economists have also suggested a fall of 10% in the same period.
Aussie homeowners may be concerned about the impacts of this on their mortgage, and first home buyers may be wondering what this means for their attempts to get a foot on the property ladder.
Let’s explore the impacts of a property value decrease for first home buyers, as well as investors and owner-occupiers.
Impact of property value decreases for first home buyers
After years of eye-watering home prices and slugging it out at auctions to get a foot on the property ladder, the prospect of property value decreases will come to the relief of millions of Australian first time buyers.
While prices will still be competitive in blue chip suburbs, as well as capital cities, like Sydney and Melbourne, increased affordability may mean more first time buyers coming back into the scene.
In fact, the latest ABS Lending Indicator figures show that in December last year, the number of first home buyer loans was still 21.5% lower than a year ago, despite increasing slightly by 1.3%. If property values were to decrease in the next year or two, we may see a resurgence of first time buyers if affordability constraints are removed.
It’s worth keeping in mind that the floor rate used to test a borrowers’ ability to repay a mortgage has recently been increased. First home buyers considering purchasing their first property may want to take note of some options to boost their borrowing power before applying for a home loan.
Impact of property value decreases for investors
There may be a chicken-or-the-egg scenario brewing for property investors. If the cash rate were to rise and lift investor interest rates, it’s predicted that the financial pressure this may put on investors could fuel house price falls.
Research from Digital Finance Analytics found that if mortgage rates rose by 25 basis points, factoring in the new higher buffer rate of 3%, “an additional 4377 investors” may face mortgage stress.
If investor expenses rise higher than their overall income, this could create cash flow issues. Even an increase of 25 basis points to the cash rate may reduce investor purchasing power, which in turn could influence the property market to fall as demand decreases as well.
Investors are seeking out opportunities to gain the highest rental yields and greatest ROI. A property value decrease may adversely impact their returns if they purchased property while the market was at its highest peak, and sold in a downturn.
Impact of property value decreases for owner-occupiers
Put simply, if you are currently repaying your mortgage and have no intention of selling in the next few years, a potential value fall may not be a blip on your radar. It’s expected that interest rates and property values may fluctuate over your standard 25-30 year home loan.
However, if you’re considering selling, this may come into play. While property values have skyrocketed in recent years, the severity of a 10% decrease will depend on when you purchased your property and the change in value over time. That being said, it may be worth considering selling the property before a potential change to the housing market comes if you’re aiming to gain the greatest return.
What may be more impactful for owner-occupiers repaying their mortgage is the potential cash rate hike that could predicate the housing market value decrease.
When the RBA lifts the cash rate, if you are on a variable home loan it is likely that your lender may pass this increase on to you immediately. Meaning, your monthly mortgage repayments will be higher.
For borrowers on a fixed rate mortgage, you will be protected from any rate fluctuations throughout the duration of the fixed term. However, that won’t stop your lender from potentially increasing its standard variable rate. Once your fixed rate term ends, if you do not refinance to a new fixed term, your interest rate may revert to the standard variable rate, which can be higher.
If you are concerned about the potential impacts on your household budget that an interest rate hike may bring, it could be worth looking into options to lessen this sting, including:
- Utilising your offset account to potentially reduce the interest charged on your home loan
- Making extra repayments now to help chip away at your principal owing
- Giving yourself a rate cut and considering refinancing to a low interest rate.
Not only does Reduce Home Loans provide offset accounts and the ability to make extra repayments on almost all its home loan products, we also offer one of the cheapest home loan rates in Australia for refinancers.
At 1.77% interest, the Super Saver Variable home loan may allow owner-occupiers to take control of their mortgage repayments by preemptively giving themselves a rate cut. Plus, if your lender does hike your interest rate with a potential cash rate increase, you can rest comfortably knowing you’re with one of the most competitive lenders in the market.
If you’re considering refinancing to combat the impact of interest rate hikes, or if you want to speak to an expert for more specialised advice, please don’t hesitate to call us on 1300 733 823.
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