Headlines like - Australian housing prices have experience their steepest drop since the global financial crisis – are sparking fear and confusion amongst home owners.  Reports of declines in value of 9% and 7% in Sydney and Melbourne respectively are making daily headlines, but on the flipside, there have also been small increases in housing values in Canberra, Adelaide and Brisbane.  So what is behind these changes and what does it mean for the value of your home and your mortgage?

In late 2018, the Reserve Bank of Australia (RBA) reviewed a number of factors that could be impacting on housing prices.  These factors included the changes in housing lending policies (how easy is it to borrow money), housing debt vulnerability (homeowners likelihood of defaulting on their mortgage) and changes in interest rates. The findings found that the most likely contributor was the tightening in lending. 


The fact that less people are able to access funds to buy houses (particularly investors) will continue to impact on price of houses because the level of demand is decreasing while the supply of both new and old stock continues to increase (a key premise of Economics 101). The generally held view is that prices will continue to fall over the next 12 months or so, but this will prevent bigger downward movements in the housing market over the longer term.  This is positive news for homeowners worried about their debt position.


Is there an upside to all of this?

  • Australia has a very high level of household debt, but today the cost of servicing that debt is at an all-time low. Interest rates are at the lowest levels for many years and can be part of a number of strategies that put households ahead on their mortgage repayments. On average, Australian households are currently not struggling to repay their debts and according to the RBA many are almost 36 months ahead of their required repayments.  There are however, households that are vulnerable to the dropping values because the size of their debt is large in comparison to the value of their asset (i.e., I owe more than I own).  These homeowners should consider options for taking advantage of the current low interest rates and reviewing their mortgages.
  • Even though interest rates are low, employment impacts on the ability to pay. Unemployment levels in Australia are fairly steady, but given challenges across a number of our partner economies it again pays to stay one step ahead of the game and put strategies in place in the event of unemployment.
  • Tighter lending conditions means that the heady days of borrowing on nothing more than existing equity, are gone. Lenders have introduced measures aimed mainly at investors (particularly interest only loans) to manage potential household debt when these loans become repayable.
  • Some interesting trends are also appearing in the first home buyer’s market, with an increase in activity and confidence about being able to enter the market because of lower prices. But with lenders now wanting larger deposits saved, there is also likely to be an increased reliance on ‘the bank of Mum and Dad’ to secure the loan.

Pulling these various factors together, the general view is that the decline in house prices is due to the reduced supply of credit for potential borrowers and not household debt based stress.  This means that while prices are likely to continue falling, it is not expected to result in large scale mortgage defaults.  Having said this however, it is always better to be prepared and one step ahead of whatever the market does next. The friendly staff at ActonAdviceGroup are happy to answer your questions, contact us today for a free initial consult.

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