“The boom is over and real estate prices are falling, while the decline is accelerating,” said Shane Oliver, chief economist at AMP Capital.
Purchasing agent Cate Bakos adds: “It remains a highly segmented market with regional and capital market prices not falling and rising in synchrony. Buyers are becoming more picky, which means that there is still a lot of demand for well-renovated homes with amenities.”
A shortage of building materials, rising renovation costs and the difficulty of finding experienced and qualified craftsmen are making buyers less and less inclined to buy a home that needs extra work, Bakos says.
In Sydney, buyers’ agent Patrick Bright says there is more and more “argy-bargy” on the market as the likelihood of prices falling in the coming months means buyers are unwilling to pay the asking price.
“That’s the mental gymnastics caused by the increasingly negative sentiment,” Bright says.
Prestigious properties with unique attractions, such as harbor views or proximity to quality schools, continue to attract buyers, particularly from China, Singapore and Hong Kong, agents say.
Sourcing agent David Morrell says, “Triple A areas are getting stronger and still seen as a safe haven.”
Morrell says he will “put his head in a noose” by predicting that price gains and weakening sentiment “will not affect Melbourne’s summit by one iota”.
Martin Schiller, a sales agent for Savilles specializing in Sydney properties ranging in value from $10 million to $30 million, agrees that the high-end, prestigious end of the market remains robust.
“There is price erosion where price is the only difference in the property compared to competing properties in the market,” says Schiller.
According to CoreLogic, which monitors property markets, Sydney’s clearance rates have fallen below 50 percent, which is the worst outcome since the outbreak of the COVID-19 pandemic imposed restrictions on home inspections and auctions in early 2020.
Sales and prices are falling
Auction numbers are down more than 20 percent in the country’s combined capitals, including a 40 percent drop in Melbourne.
Market tension is mounting, with the Reserve Bank of Australia raising spot interest rates to 1.35 percent, up 0.5 percentage points and the third consecutive rate hike in three months – the fastest consecutive rate hike in nearly 30 years.
Oliver of AMP Capital expects the spot rate to peak at around 2.5 percent in the first half of next year, with cuts in the second half of next year. He expects prices to fall by about 15 to 20 percent.
Martin North, director of Digital Finance Analytics, an independent financial services consultancy that also expects prices to fall by about 20 percent, warns that buyer confidence is declining and payment capacity is declining rapidly due to rising interest rates.
“If you really need to sell, then you need to sell,” North says of rising costs of living driving some sales. “The lenders discreetly encourage troubled property owners to market their places.”
The number of distressed homes according to SQM Research, which tracks real estate markets, NSW was up more than 10 percent in June compared to the previous month as owners struggled with falling demand and rising costs.
The Gold Coast has the highest number of distressed homes, with 315 homes, followed by Western Australia’s central coastal area with 201, and Queensland’s Sunshine Coast with 185, according to SQM.
Distressed home listings occur when a home needs to be sold quickly, often at a discounted price and possible financial loss to the owner.
Recent examples of heavily discounted sales include a detached three-bedroom Victorian cottage in South Australia’s Port Pirie, which had a price cut from $119,000 to $99,000 after being on the market for more than 420 days.
In Seven Hills, about 36 kilometers northwest of Sydney, the price of a six-bedroom, two-bathroom home has fallen by $20,000 to $930,000 after being on the market for 55 days.
A house in Tartura, about 180 kilometers north of Melbourne, has dropped its price from $870,000 to $660,000 after being on the market for 58 days.
In an effort to sell prestigious apartments, developers are offering agents higher commissions and lucrative packages for interior design and furniture for penthouses and sub-penthouses for a $3 billion project on Melbourne’s Southbank.
Borrowers, who struggled a little over a year ago to obtain very low-rate mortgages, are switching to floating-rate in record numbers, usually when their fixed-term terms expire.
The prime interest rates for the top one-, three- and five-year fixed rates that had fallen below 2 percent last year for a $1 million borrower with a 20 percent down payment seeking a 30-year loan have more than doubled.
But there are still a number of competitive rates for competitive borrowers.
For example, the cheapest comparison rates for a fixed-rate year (which is the true cost of borrowing, including additional borrowing costs) range from 2.82 percent from Tic:Toc Home Loans to 4.69 percent from Beyond Bank.
“Borrowers are still eager to lock in a low fixed rate,” said Laura Osti, spokesperson for Tic:Toc.
Cheap three-year rates include BCU’s 4.75 percent comparator rate and Goldfields Money’s 4.48 percent.
The cheapest standard variable comparison rates of the big four range from 3.29 percent to 3.48 percent.
The Australian Finance Group, the country’s largest mortgage lender, says the number of borrowers applying for a fixed-rate mortgage has fallen from a record high of 40 percent this time last year to less than 10 percent.
The total value of the refinancing rose more than 3 percent in May, with owner-occupant refinancing reaching an all-time high, according to the analysis by the Australian Bureau of Statistics.
Cashbacks and discounts
Borrowers can negotiate more competitive rates and large cashbacks. For example, Citi offers $4,000, with the home loan being $750,000 or more for new purchases and refinancing applications. The amount increases to $6000 when the loan is $1 million or more.
Important things a borrower should consider with a new loan include:
- What rates are offered and are there financial incentives to cover switching costs?
- Can additional payments be made for the next rate increase?
- Is the loan transferable so that it can be transferred to another lender?
- Does it include money-saving features, such as a contra account, or does it allow additional payments?
- What are the fees and costs? Brokers claim that few borrowers break flat rates, which can result in high discharge costs. Other costs to consider include application, settlement, and state government fees, such as mortgage registration, which can cost $500.
Mortgage brokers, such as Christopher Foster-Ramsay, director of Foster Ramsay Finance, argue that lenders are more likely to negotiate cheaper variable rates for borrowers on packages that also include other features, such as waived fees on credit cards, discounted insurance, and offset bills.
Contra accounts make it possible to lower the mortgage interest by depositing periodic payments or lump sums, such as bonuses, into a savings or current account.
Some banks allow borrowers to open multiple contra accounts – one for bills and committed expenses, and another for daily expenses.
Brokers claim that lenders will negotiate discounts of about 200 basis points on the standard floating rate to attract a new borrower and 120-150 basis points to retain an existing borrower.
The accompanying table compares packages of the big four, including additional fees and charges, plus the banks’ lowest variable rates. Annual fees that range from $120 to $395.
“The savings from the contra account should generally cover the costs,” Foster-Ramsay says.
More difficult to borrow
The useful buffer of 3 percent of the prudential supervisor also has consequences for borrowing capacity. It means that a borrower with a 4 percent mortgage will have his financial capacity assessed at 7 percent by a lender.
“Property buyers have been negatively impacted as interest rate hikes have not kept pace with price declines,” said AMP’s Oliver. “This means their borrowing capacity has been reduced, but house prices remain high,” he says.
Agents claim it is a growing problem for buyers who need to borrow up to their maximum borrowing limit.
“Normally, upgraders and investors have some equity under their belts,” says buyer’s agent Bakos. “Those who need to borrow according to their ability are under increasing pressure as rising rates can squeeze their budget,” she says.
Investors remain drawn to rising rental yields as vacancy tightens across the country, brokers say.
According to SQM Research, Sydney’s combined rents are up 17.5 percent in the past year, Brisbane 19 percent and Melbourne about 15 percent. Investors’ share of new mortgages rose early in the year as many sought an alternative to volatile stock market investments, agents say.
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