The 13th increase in mortgage costs in less than two years is forcing a rethink among buyers, sellers, investors, downsizers and homeowners.
Retired UN civil servant Linda Wirth and her two adult daughters, Lara and Jessye, are planning a multigenerational response to the rising costs of mortgages and shortage of rental accommodation.
Linda is selling her two-bedroom loft apartment in Camperdown, about four-kilometres south-west of Sydney’s central business district (CBD), to buy a home the family can share on the city’s outskirts.
Linda Wirth and her daughter Lara. Louise Kennerley
“I want to get rid of my small mortgage, which has almost doubled in the past two years, and create a multigenerational home for my daughters, so they can get out of the rental market and live somewhere that is secure and affordable,” she says.
Buyers, sellers, investors and downsizers are rethinking their property strategies as the fastest interest rate rises in 40 years push up prices in a market struggling with cost-of-living stress and a shortage of housing.
The 13th increase in cash rates to 4.35 per cent means a borrower with a $1 million standard variable, principal-and-interest loan with a 20 per cent deposit is paying interest of 7.11 per cent and making monthly repayments of more than $7000 – a rise of around $2400 since rates started rising in May 2022 – according to RateCity, which monitors rates. This assumes they’re on the same loan. RateCity adds that borrowers with good credit history are likely to have negotiated cheaper rates.
An investor on the same terms is paying about $7300, an increase of around $2460. Investors purchasing through a self-managed super fund (SMSF) are paying around 9 per cent.
Hayden Groves, president of the Real Estate Institute of Australia, says rates rising at their fastest pace in 40 years will continue to have “serious knock-on effects” across the market.
Economist Shane Oliver, chief economist for AMP, is among many predicting that while rates could begin to fall by the middle of next year, there is a 40 per cent chance in the short term of another increase. Former RBA board member Warwick McKibbon warns that the cash rate may need to go to 5 per cent.
But tough markets create opportunities for determined buyers and ready sellers, while those stretching to make higher repayments can leverage their properties, or cut costs, to make ends meet.
Market specialists provide advice on how to play the property market.
“Those that have to sell should move quickly,” says James Kirkland, executive general manager of Little Real Estate, an agency with around 15,000 properties under management along the east coast.
Higher rates are likely to squeeze many with big loans, potentially forcing sales. Simon Letch
Kirkland expects a flood of properties for sale as downsizing home-owners, investors and those forced to sell hit the market, boosting buyer choice and putting downward pressure on prices.
“The window of opportunity is still open for sellers,” he says. “There is still strong buyer demand and low stock levels.”
A recent uptick in properties for sale is an early warning that some homeowners are trying to get in front of a change in market sentiment while prices are still strong, he says.
But supply shortages, exacerbated by booming immigration, should absorb much of the increased supply, says AMP. It estimates housing starts of around 170,000 this year will fall short of demand by about 70,000.
Tamara Chang, a mother of three, is downsizing from her five-bedroom family home in North Balgowlah, about 14 km north-east of Sydney’s CBD.
Tamara Chang with dog Maisie outside her North Balgowlah home. Louie Douvis
“I was very lucky to get into the market in 1999 but purchased this property in 2002 when rates were ridiculously low [cash rates were 0.22 per cent],” Chang says. “Rapidly rising rates have been hard for many new buyers.
“The market is unpredictable, but I am confident of selling. Investors could pick up a good deal because the market is highly volatile.”
Wirth says there has been buyer interest “but many do not have the finances” to purchase. She was based in Geneva with the UN for 22 years before moving into her Camperdown loft apartment with a five-metre ceiling that borders Sydney University and the Royal Prince Alfred Hospital.
Wirth believes there is strong demand for Sydney’s top-end market – where buyers are not influenced by interest rate rises – but fears demand for middle-range properties of $1 million-$4 million has been weakened.
Patrick Bright, a Sydney-based buyer's agent who specialises in properties valued between $2 million and $5 million, says the rate rises “temper buyer enthusiasm and how much they are willing to pay”.
“But people are still going to buy,” Bright says. Buyers who’ve sold for lower than expected are likely to pay less for a new property than planned as they’re transacting in the same market.
Matt Turner, a mortgage broker with GSC Finance Solutions on the mortgage belt along Victoria’s surf coast, says buyers are still digesting Tuesday’s rate increase.
“Before that, inquiries about purchasing had been strong, particularly from first home buyers,” he says. “There is not a lot of supply and confidence was returning because rates had not been rising every month.”
Melbourne buyer’s agent Cate Bakos says demand from upgraders and downsizers remains strong. “Competition is tough [due to lack of supply]. You would not know there are interest rate pressures,” Bakos adds
“Aggressive upgraders are finding it really tough and typically trying to coordinate the purchase [of the new property] and sale [of their home] for the same day, which means all parties need to be flexible.”
Kirkland advises buyers looking for a bargain to be across prices in their chosen area and whether properties are tightly held. They should also get their finances in order by finding a lender and agreeing their loan limit and interest rate. “Raise a deposit – the bigger, the better – and secure loan pre-approval,” he says.
Mortgage brokers claim lenders are cutting their mortgage rates by more than 2 percentage points for borrowers with deposits of at least 20 per cent, clean credit histories, reliable incomes and properties in the right location.
Well-organised borrowers can make the most of fierce competition among lenders to haggle for reductions.
Mortgage brokers say there has been an increase in bridging loans among nervous downsizers and upgraders who purchased a new property – concerned about lack of supply – before selling their existing home.
“A lot are putting bridging loans in their back pocket just in case there is not a smooth transition between the purchase and sale,” Bakos says.
A buyer requiring $1 million in bridging finance could expect to pay nearly $7000 a month plus set-up fees and other lender charges, says online comparison site Canstar. A six-month, interest-only loan is likely to cost about $43,000 with average lending rates around 8.48 per cent. This is more than 33 per cent higher than a basic variable, principal-and-interest, owner-occupier loan. This is based on an 80 per cent loan-to-value ratio with average upfront costs of about $574. The cost for 12 months would be about $85,000, or around $89,000 if interest was capitalised.
Phoebe Blamey, director of Clover Financial Solutions, warns many borrowers will then face another loan for their new home, with the combined outlay being “costly”.
Investors make up about one-third of property resales but more than 56 per cent of loss-making deals, according to analysis by CoreLogic, which monitors property markets.
Michelle May, principal of Michelle May Buyers Agents, says: “There is a lack of patience and long-term planning, particularly when it comes to areas that are oversupplied.”
Lenders routinely circulate blacklists of postcodes to brokers on areas with large numbers of small apartments and off-the-plan purchases that could be hit first – and hardest – by a sharp correction.
In Sydney, these include suburbs clustered around the CBD such as Darling Harbour, The Rocks and Dawes Point. In Melbourne, it’s Docklands, Southbank and areas around the University of Melbourne.
Many investors who set up SMSFs to purchase investment properties are under growing pressure as interest rates reach 9 per cent. Clover’s Blamey says the hardest-hit investors are those whose SMSF only invests in property, rather than a diversified portfolio that includes equities and bonds.
According to the Australian Taxation Office, investment properties account for around $45 billion of an estimated $876 billion under management in SMSFs. The number of single-asset funds is not available.
Those likely to be under pressure were encouraged to use super savings to purchase small apartments, or off-the-plan units, through a DIY super fund during the height of the recent boom when interest rates were at record lows.
Blamey says SMSF borrowers on top rates should be negotiating for a cheaper loan of around 7 per cent.
She warns that switching loans could cost up to $6000 because of the additional expenses in having the SMSF trust reviewed by financial planners and accountants in addition to broker and lender fees.
Buyer’s agent Bakos says many longer-term investors using SMSFs made the most of high rents and low mortgage rates to pay down debt and “are more likely to be cash-positive”.
Monika Schmidt, mother of three teenage boys, is tackling the rising cost of living by renting out a single-bedroom apartment, or granny flat, she has built in the backyard of her home in Belconnen, about 12 kilometres north-west of Canberra.
“If I didn’t have this side gig, I don’t know how I’d stay afloat,” says public servant Schmidt about the flat that has around 98 per cent occupancy.
She used the equity in her home to pay for the build and could comfortably accommodate the rental in the rear of her 1200 sq m property.
Frank Walmsley, a director of Canberra Granny Flat Builders, says: “Homeowners own the land they are building on, so the returns are 15 per cent on average, while still being able to provide affordable rentals of $500 per week for a two-bedroom home.”
About 80,000 homes have backyard rentals, according to research group Archistar Property Platform. Building is set to accelerate as more states ease regulations to boost accommodation options.
Structures typically range from pods of less than 20 sq m used as home offices (with no plumbing) through to self-contained flats of less than 60 sq m, specialists say.
Another option is to rent out a room. Demand for shared houses is strong, according to Flatmates, a listing platform for shared houses or those looking for a flatmate. New property listings have increased by nearly 40 per cent in the past year as “rising living costs has driven people to look at new ways of generating additional income”, the company says.
Mark Chapman, a director of tax specialist H&R Block, says income from shared houses or granny flats is taxable income.
“You can get into trouble for failing to declare it,” he says. “But you can claim a tax deduction for any cost associated with your rental activity – which could include a part of the mortgage interest, as well as repairs, insurance and rates,” he says.
Further, those who rent out part of their home may be disqualified from the capital gains tax exemption on principal residences.
“If you are affected, you will need to calculate how much of the profit on disposal of your house is taxable,” Chapman says. “In most cases, this is done by working out the proportion of the floor area of the home that is set aside to produce income over the period it was used to produce income and applying that to the capital gain.”
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