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ยป Interest rates and unemployment are keys to property market future
Date published: 29/07/2011
Interest rates and unemployment hold the key to property markets future
Concerns have once again been raised over the future of Australian property prices as mortgage delinquencies increase and anecdotal reports of home owners seeking leniency from lenders surface.
Some are suggesting that unless incomes begin to rise in line with the exceptional jobs growth we are experiencing, times could get a lot tougher for many Australians if interest rates increase further.
It is this tenuous balance between employment and interest rates that many experts believe holds the key to the immediate future of house prices.
According to a Sydney Morning Herald article, reports from the Financial Ombudsman Service, which handles disputes between banks and their customers, indicate that more Australians are seeking a repayment reprieve from their lenders due to financial difficulties.
Rating agency Fitch recently released a report that found 1.23 per cent of mortgage holders – or one in 400 – had missed one or more mortgage repayments to the end of March in comparison with 1 per cent at the end of last September. In beleaguered Queensland, the rate was 2 per cent.
This increase is partly due to Victorian and Queensland home owners displaced by the floods, experiencing financial hardship and being forced to pay mortgages on homes they could no longer occupy. But according to Fitch, the primary reason for increased delinquencies is the rising cost of living.
Chief ombudsman Colin Neave, says the problem also lies in interest rate rises putting pressure on household budgets. He reports that the agency has experienced a “consistent increase” over the past six months of financial difficulty disputes, which has led to the mediatory body pushing banks to better handle these “traumatic” situations.
Neave says, “People are encountering difficulty at the moment. The feeling we have is this is a trend which will continue for a while yet.''
This emerging and worrying trend, with mortgage arrears now at their highest level in 15 years, comes as unemployment sits at a low 4.9 per cent and we are on the brink of what promises to be a long running mining boom.
On a positive note, the big four banks say the proportion of mortgages in 90-day arrears remains well under 1 per cent and the official 1.23 per cent recorded by Fitch is relatively lo by global standards.
The Reserve Bank acknowledges that some households are struggling with their mortgage repayments, but say most households have proven “resilient” to higher loan repayments.
According to chief economist at AMP Capital Investors Shane Oliver, ''One or 2 per cent is not a problem. But the likelihood is that arrears will rise, which could become a problem.''
While the Reserve Bank strives to manage our two speed economy, our fractured housing markets are seemingly running at six speeds. While the price of established homes in Perth and Brisbane have dropped by 7 per cent in 12 months, Melbourne property prices increased by 1.1 per cent for the year to May but fell by 2.5 per cent for the March quarter, according to data from the Australian Bureau of Statistics.
The ABS says established house prices declined by 1.7 per cent across all eight capital cities for the March quarter and Merrill Lynch analysts are forecasting a 10 per cent drop from the June 2010 market peak.
However despite reports that Australia’s housing market is over-inflated by as much is 40 per cent, most industry experts and economists reject the possibility of a crash in property prices, even though it’s likely that interest rates will rise again this year.
They say the ongoing undersupply of housing and rental properties in particular, as well as the impending mining boom, will prevent such a drastic occurrence.
''We are seeing a softening of the housing market explained by economic factors,'' said Real Estate Institute president David Airey this week. ''Not a bubble starting to burst.''
ANZ's head of property research Paul Braddick, believes the current ''weakness'' will have passed soon into the new year, but this is on the proviso that we don’t experience a rapid rise in interest rates or unemployment, both of which could quickly worsen the situation.
According to economist Saul Eslake, the property market and wider economy is relatively sheltered from the rising number of mortgage defaults.
''Are there enough of them, across the country, to impact house prices in general? I suspect the answer is no,'' he says.
I would agree with Eslake’s conclusion and think that most of the issues with home owners’ financial capacity is confined to the traditional mortgage belt, outer suburbs.
Many first home buyers over-committed off the back of the government’s first home owner’s grant boost and without ever having established a savings habit, are now struggling as interest rates creep up.
The good news is, the majority of Australians who own property are coping well with the rise in interest rates and it’s likely that many of them will continue to do so in the coming months.
For more information, or to discuss your specific situation, please contact me directly.
Michael Yardney
Metropole Property Strategists
Michael Yardney is the director of Metropole Property Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. You may subscribe to his e-magazine at www.propertyupdate.com.au. For more information about Michael visit www.metropole.com.au.
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