Imagine in November 2019 you looked into a crystal ball and foresaw a global pandemic about which we would still be grappling two years later. Would have you then thought it would be a good time to buy or sell a house?
You might have thought economic pandemonium and the shuttering of borders to overseas travellers would signal bad news for the housing market and thus it would be a good time to sell.
After all in November 2019, the market was pretty weak and house prices were barely growing. So maybe you decided to grab the money before a crash and laugh all the way to the bank.
If you did, you clearly forgot the mantra of Australia’s political class – the housing market must not falter.
And so two years later in November 2021, the value of new mortgages taken out was 64% higher than it had been two years earlier:
The raft of economic stimulus measures from the record low interest rates to the HomeBuilder program have propelled a surge in mortgages being taken out:
While there had been a bit of a slowing in the growth of new mortgages during the lockdown in NSW and Victoria, November saw a strong pick up of 6.9% across the nation, led by 9% in NSW and 7.9% in Victoria:
It all suggests that house prices will continue to grow strongly at least for the first half of this year.
While thankfully the growth of mortgages is not at the nutty levels observed in the middle of 2020 when the value of new mortgages rose by as much as 160% over the previous year’s levels, the current growth suggests the annual rise in property prices will remain around 15%-20% for some time:
But fortunately, we have lower interest rates, right? Well … for now.
As I noted last week the market very much expects interest rates to rise this year (I must admit, I am less bullish). But even still, the lowering of interest rates has not improved affordability by as much as you might expect.
Across the nation the size of the average mortgage has grown strongly during the pandemic.
Among the eastern states, the average new mortgage has grown between 22% and 25% since November 2019, while in Tasmania it has increased 31%:
That massive increase is not enough to overcome the drop in interest rates.
In NSW, the average mortgage in November was $769,459 – just over $156,000 more than was the case two years earlier.
Had you taken out a 30-year mortgage in November 2019 worth $613,334, paying the then average discounted mortgage rate of 4.15%, you would have been paying $2,981 a month in repayments.
By contrast if you had taken out a $769,459 loan in November last year at a rate of 3.45% then your repayments would be $3,434 a month – $453 more:
This is the issue of housing affordability. It’s all very well to talk up low interest rates, but if the principle has increased so much as to negate the falling rates, then you are not better off.
It’s always worth remembering that falling interest rates help most those who already have a loan.
Those who took out a loan in Sydney 10 years ago have absolutely benefited from falling rates – their repayments are about $1,000 less – while the increase in house prices has meant new entrants are less well off:
And crucially, those who have taken out loans in the past two years will not benefit from rates falling – this is as low as they will ever get.
For first-homebuyers the news is not as bad.
Overwhelmingly the growth in mortgage size has come from those likely selling their house and buying a new one:
But even here the average first-homebuyer mortgage in NSW has risen 16% ($82,362) since November 2019. This has meant paying an extra $173 a month on average compared to a first-homebuyer who took out a loan two years ago.
And remember that is $173 extra. The average monthly repayments in NSW on a first-homebuyer loan paying the discount mortgage rate of 3.45% are $2,557 – or nearly $31,000 a year.
So yes, low interest rates make affordability better than it would have been with higher rates. But those low rates and the fiscal measures in turn increase prices and thus affect mortgage sizes.
For new homebuyers it seems they always get hit either way.