As interest rates rise, house prices in Sydney are falling and experts say it’s a “clock” for what’s to come in the rest of the country.
Most important points:
- Interest rates are driving the decline in property values in Sydney
- The Reserve Bank of Australia raised the spot rate to 0.85 percent.
- The average mortgage in NSW is $786,035
After hitting record highs in January, house prices in Sydney are down 1.5 percent, according to CoreLogic data.
While the cost of buying a home in Australia’s largest city remains 22.7 percent above pre-COVID levels, the decline in value is accelerating by the month, driven by rising interest rates.
Martin North of Digital Finance Analytics said Australia was already having a “housing crisis”.
“I actually think the next evolution is falling prices, there’s a very high risk of significant declines,” he said.
“House prices are way too high relative to incomes – debt-to-income ratios of six to nine times are not acceptable.”
Mr North said Sydney was a whistleblower for what was soon to hit the rest of the country.
“This is not just a Sydney/Melbourne problem.
“What usually happens is that Sydney tends to be the first to respond because of the significant influence there is.
“Then Melbourne will follow and then other areas may follow 12 to 18 months later.”
On Tuesday, the Reserve Bank of Australia raised the spot rate by 50 basis points, or half a percentage point, to 0.85 percent.
“If we see interest rates rise another 150 or maybe even 200 basis points, it would increase mortgage repayments by about 24-25 percent and decrease borrowing capacity by about 20 percent,” said PropTrack economist Paul Ryan.
“It really reverses all that affordability gains that we saw during the pandemic period when interest rates were lowered to all-time lows.
“We’ve seen Sydney slow down quite dramatically. It’s the fastest slowdown in a six-month period since 1989.”
Real estate agent Mario Carbone, who works for Ray White in Sydney’s west, has already noticed a significant drop in buyer activity.
“It’s down about 47 percent, from the foot traffic to the open houses, online inquiries, even the phone calls, we get every day,” he said.
“We’ve seen buyers be more cautious and probably sit on the sidelines of an auction to see what the outcome might be.”
According to Steve Mickenbecker, Canstar’s chief commentator, “there is a silver lining to falling prices”.
“A lot of people predict a 10 to 15 percent drop in house prices. That makes it easier to put down a down payment.”
It’s bad news, though, for those who’ve paid “top dollar” in the past two years and bought with less than a 20 percent down payment.
“A lot of people will have bought well below the 20 percent down payment,” Mickenbecker said.
“People who bought at 5 or 10 percent will end up in negative equity.”
From eastern Sydney, where people are “overstretched,” to Campbelltown in the city’s southwest, mortgage stress is biting.
A recent survey by Digital Finance Analytics found that across the country, an increasing number of households are spending more on basic needs and loans than they earn on income.
“People are already making terrible trade-offs between the different things they want to do,” said Mr North.
“We’ve seen people in our surveys say, well, you know, we need to eat, but we might not be able to buy the kids’ clothes we expected to buy now.
“Very often people give up dental treatment because they can put it off.”
The map shows the number of households experiencing financial stress per zip code.
The data comes from a household survey where information on income and expenses is collected, excluding non-discretionary items such as vacations.
Households with negative cash flow are considered financially stressed.
The average mortgage in NSW is $786,035, according to data released Friday by the Australian Bureau of Statistics, while the national average is $611,154.
In such difficult times, the experts’ advice on what people can do is “look around” and keep track of refunds, if you can.
“Take a cheaper loan so you don’t notice the increases as much,” Mickenbecker said.
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