How could a property peak affect your home loan?

With Australia’s owner occupiers taking out bigger home loans, and signs pointing to national housing values potentially approaching a peak, what risk could home owners face if they were to come face to face with a downturn in the future?

According to recently released figures from the Australian Bureau of Statistics (ABS), the national average mortgage size for owner-occupiers reached a record high of $595,568 in November 2021. 

The value of new housing loan commitments also rose 6.3 per cent to $31.4 billion in November 2021 (seasonally adjusted) following three months of falls. Around one third of this activity came from investors, whose new loan commitments rose in value by 3.8 per cent to reach a new all-time high of $10.1 billion.

However, this rebound may not herald a sustained upward trend. According to CoreLogic research director, Tim Lawless, while housing markets around Australia have not yet reached their peak (defined as “a consistent trend in negative monthly movements”), many may have already moved through a peak rate of growth around March 2021.

In other words, average property values may still be increasing, but are growing more slowly than they were in the past. 

According to Mr Lawless, the three biggest factors to affect market movements are:

1. Policy-related factors such as interest rates and credit availability
2. Market factors like the trend in advertised stock levels and housing affordability
3. Economic factors such as labour market conditions and wages growth

Additionally, other signs to watch for include:

• rising advertised stock levels
• affordability constraints
• weakening auction clearance rates
• softening vendor metrics such as longer days on market and larger levels of discounting

“Normally, housing growth trends will gradually slow before moving into a correction phase, which is what we are seeing at the moment… It’s fair to say we are currently seeing a softening in all of these metrics, albeit from an historically high base.”

That said, a peak may not be immediately around the corner. Even though an increase to the national cash rate (which could push up home loan interest rates) is on the cards for the future, potentially as soon as 2023, Mr Lawless added that the Reserve Bank of Australia (RBA) is unlikely to tighten its policy settings with so much uncertainty associated with the latest Omicron case numbers.

RateCity research director, Sally Tindall, said that while growth in property prices is starting to slow on the back of fixed rate rises and a crackdown by the regulator, the opening up of borders this year will likely increase demand, keeping prices moving north. This could potentially price many young first home buyers out of “the hottest property market in decades.”

But if Australia’s property values were to reach a peak, what could home owners expect to experience if this led to a downturn?

If property values were to fall sharply in your area (like they did following the end of the mining boom in areas like Perth and Darwin), home owners could discover that they no longer have enough equity available in their properties to easily refinance their mortgages. It’s even possible to end up in negative equity, where you owe more money on the mortgage than the new value of the property. Of course, with many Australian households already being ahead on their home loans, their risk of ending up in negative equity may be lower.

Because it’s not possible to accurately predict the future of Australia’s property and mortgage markets, it’s important to consider your own financial situation, compare home loan options and make the best choices to suit your needs. You can also consider contacting a mortgage broker for more specific advice.

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