Millennials are balancing falling prices and rising rates

The auction clearance rate dropped to its lowest level since April 2020. At that point, COVID panic crippled a country that had been indefinitely cut off and cut off from the world. Still, the common expectations of an economic armagedon in the Australian housing market proved merely temporary.

Instead, the potent mix of ultra-low interest rates and massive government stimulus quickly sent asset prices back up and soaring higher. This was a worldwide phenomenon but the stellar performance of Australian house prices as of October 2020 was particularly striking given their high base.

It’s tempting to claim my own predictions have been more reliable, though only in the sense that someone has tried to time the housing market in recent years should have done the opposite.

Guess who sold their apartment in September 2020, for example? Guess who also downsized their large family home a few years earlier due to maintenance costs — only to realize that the shift to working from home meant that big houses were suddenly worth their weight in plumber’s gold?

Not that I deserve any sympathy. Like most of the baby boomer generation, I can only count myself lucky. Buying a first home in an Australian capital a few decades ago was the best possible investment for long-term wealth building.

Even the strange recession or the straightened household budgets forced to accommodate the 17 percent interest rate hasn’t changed that trajectory.

The question now is what will happen to a generation of millennials who have recently bought or are trying to buy their own first home.

According to the latest census, the percentage of millennials in the population is now equal to that of baby boomers. Yet their ability to build their wealth with home ownership is much more vulnerable.

It’s not just that they’ve never experienced an era of high inflation or rising interest rates. It is the combination with the gigantic mortgages that so many have had to take out, especially in recent years.

They were certainly encouraged to take the risk by Lowe’s argument that the cash interest rate would remain at 0.1 percent through 2024 without anyone listening to the modest caveats about what sounded like an RBA guarantee.

But rapidly rising prices are making aspiring real estate tycoons of all of us. After all, investing in Australian homes has always been a good bet.

Astute readers may recall my frantic efforts to get my son and his fiancée to become apartment owners for the first time, as home prices rose again just before the 2020 COVID shock.

“Next time just make a higher offer,” I insisted after several near misses. When COVID hit, they were thankful they failed to win, and even more thankful that they ignored my advice.

By April 2021, when prices rose again, they—along with thousands of others—had regained their willingness to head headfirst into a rising tide. SOLD!

Yet the alarming size of the loan was enough to make me slightly queasy at how quickly a young couple could start paying just a portion of it up to an understandable dollar amount.

But until recently, they could still feel richer every month — at least in theory. I no longer look at tables showing the monthly increase in payments for every 0.5 percent increase in cash interest. They can’t avoid the bleak calculations, but we politely ignore the topic in conversation.

It will be harder to avoid following the RBA’s announcement of what is expected to be another 0.5 percent increase. More pain is expected in the coming months.

That inevitably translates into house prices continuing to fall as mortgage payments rise. The only uncertainty is how much in either case.

House prices in Sydney fell 1.6 percent last month and 1.1 percent in Melbourne, according to CoreLogic. That decline still sounds manageable – good news for indeed people who want to buy.

Banks are also confident that their more recent mortgage customers will be able to take higher repayments unless unemployment rises. In view of the extreme tightness in the labor market, this seems unlikely.

But how far does the interest go? More economists scoff at central bankers’ ability to coordinate a soft landing that brings inflation back under control while avoiding a recession.

Typically perversely, market sentiment now suggests that a deteriorating global economyrather grab the hand of central banks and lower than feared. Lowe might have a little more leeway.

I no longer do real estate, in or out, and I have stopped giving real estate advice to my millennial children.

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