What next for property prices?

What next for property prices?

This property sector has had considerable government support during the pandemic with a range of initiatives including assistance for some new home buyers and renovators. Banking support in the form of loan deferrals to many has also supported. That said, these arrangements will eventually end, and we consider that many homeowners could be unable to return to full loan repayments and pay of their debts.

However, this sentiment that was held 8-12 months ago is no longer the case.

We have seen property prices boom over recent months, increasing by 20.3% over the past 12 months (to 30 Sept 2021). Many experts point to the low volume numbers, whilst others cannot explain the spike and believe with debt so cheap, people are able to pay a lot more for properties, especially when their emotions come in to play, and real estate agents are not bound by any ethical standards or any standard for that, so are playing on the emotions and fear of missing out of buyers.

The government or the “independent” Reserve Bank of Australia have a number of levers at their disposal. Prior to the pandemic, the government had put in place strict rules and regulations around borrowing arrangements, which were relaxed during the pandemic.

With rising household debt, the government are looking to re-introduce these measures in an attempt to stabilise the property market.

The Reserve Bank of Australia are watching closely, and may look to increase the cash rate to further put the handbrake on rising property prices.

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We have heard a lot of noise over the past two weeks coming from regulators & influential players:

  • Rising house prices and rapid home loan growth have reached such a tipping point that the chief executives of the Commonwealth Bank of Australia and ANZ took the rare step last week of urging regulators to help cool the market.

  • “Sharp rises in housing prices that are not associated with fundamentals could lead to instability by raising the risk of a subsequent decline,” RBA assistant governor Michelle Bullock

    “Whether or not there is need to consider macro-prudential tools to address these risks is something we are continually assessing,” she said, but gave little indication the RBA believed an intervention was needed at this stage.

    In other words, if there were a bubble in house prices, it could pop.

  • RBA governor Philip Lowe last week expressed a view that tighter lending standards were not the most effective way to deal with the hot property market.

  • Treasurer Josh Frydenberg has given backing to regulators to crack down on high debt home loans to reduce financial risks from record-low interest rates and surging property prices.

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It’s a different scenario to between 2014 and 2018 when APRA imposed restrictions on rampant investor lending and interest-only loans.

Back then, bank credit quality standards had deteriorated and posed risks to the economy and financial system.

Today, regulators believe banks have maintained prudent lending standards, with the major concern being housing affordability, and those over-committing themselves.

Overall, more than two in five (42%) households were experiencing mortgage stress in August.

While some households were able to refinance their mortgages, the COVID-19 restrictions have slashed some of their incomes.

There are four housing credit risks that APRA is closely monitoring

Three of those risks have barely changed from previous trends; investor lending, interest-only loans and high loan-to-valuation borrowing. They are relatively low and stable.

The one risk metric that has accelerated is loans with high debt-to-income ratios.

In addition, now more then one in five home buyers are now borrowing more than six times their incomes, a risk that could be felt if interest rates jump or people lose their jobs.

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While regulators have come out and said they “will not target house prices or affordability” the debt to income ratio is a key benchmark they are scrutinising and could apply further measures to.

We saw in the USA in 2008 prior to the Global Financial Crisis the debt to income ratio was sitting at 150%.

However, after the US property market experienced a crash, we saw Americans continue to save and repay their mortgages, which saw their debt to income ratio reduce significantly.

This was in contrast to what happened to the Australian residential property market.

We saw the government intervene to prevent any fall to property prices – which saw the debt to income ratio in Australia continue to rise, and surpass 150% a long time ago (2005/06).

And over the past 13 years the debt to income ratio as been on the rise towards 200%.

Yes – the two property markets are completely different, underpinned by different metrics, banking systems, and supply/demand issues. However, the debt to income ratio is concerning and has made the government and regulators take action.

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When prices are rising very rapidly and there are expectations that this will continue, borrowers are more likely to overstretch their financial capacity to purchase property

And as interest rates are very low, people can afford to borrow more.

No decision has been taken by the independent regulators. Any announced crackdown could still be some weeks or months away, as more lending data becomes available and regulators fine-tune potential measures.

However, the RBA said, it does not expect interest rates to increase before 2024, until inflation is sustainably in the 2-3% target range.

We have seen banks not wait for regulators and take measures into their own hands, implementing further measures to reduce their own risks.

We have seen the affordability interest rate (or stress test) increase in recent months.

In June 2021, we saw CBA increase its loan assessment for borrowers. CBA firstly raised interest rates on fixed rate mortgages. However, CBA did not stop there, they then went on to increase the interest rate floor on which they assess home loans to 5.25% up from 5.10%.

However, the interest rate buffer remained the same at 2.5% - that’s the rate above the current interest rate that the bank stress tests prospective borrowers.

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AMP economist Dr Oliver said he had already predicted a slowdown to 7% from a likely 20% national gain this year – as some form of regulator-driven curbs on mortgage lending were likely.

Recent announcements from the Council of Financial Regulators was making plans to bring in macro-prudential measures confirmed his own forecasts, Dr Oliver said.

“It’s given me more confidence we will see a more sustained slowdown into next year,”

What does this mean for you?

  1. Stress Test - Try not to overstretch yourself no matter how tempting it might be to take out a bigger loan for the “dream home”. Ensure you have a buffer so you can absorb a rate rise of 2 or 3 per cent.

    • Are you one of the people that have over 6x your debt to income?

    • e.g. if your household income is $200,000 p.a. is your debt more then $1,200,000?

  2. Don’t keep up with the Jones’ - Work your way up the property ladder. If you can’t afford a house in your preferred suburb, consider a townhouse/duplex or another suburb.

    Don’t overpay for a property. Property prices don’t always go up.

    Do your own research around property prices and the valuation. As we have seen 98% of bank valuers claim the value of the property is what the purchaser is willing to pay for it.

  3. Relocation - Think about relocating out of expensive cities. It’s an increasingly popular way of dealing with rising costs and has been made easier with working from home. Popular locations are typically about two hours’ drive from workplaces with good roads and rail links.

  4. Rentvesting - Look at becoming a “rentvestor”. This is where you rent where you want to live but buy an investment property where you can afford.

  5. Offset Account - Consider an offset account that is linked to the home loan and can help reduce interest paid. Any money in the account can be used to offset the balance of the loan, reducing the amount of interest charged each month.

  6. Split Loan - Consider a split loan. It involves having part of the home loan balance charged at a variable rate and part at a fixed rate. Borrowers can choose how to split the loan. It means borrowers have the flexibility of an offset account and ability to make extra repayments on the variable rate.

    • We see some that target to repay the “variable” amount in the 2 year period.

    • e.g. $700,000 loan - $600,000 fixed and $100,000 variable.

    • The plan is to repay the $100,000 variable loan over the next 2 years.

  7. Review your budget/ cashflow - Cut back on expenses and debts. Review discretionary spending such as streaming services or gym memberships to see what can be reduced. Look at the structure of your accounts. Refer to our account structures to understand what amount of your income gets attributed to your mortgage repayment

  8. Understand your situation - Don’t just rely on the bank to tell you how much you can borrow. Work out how much you are comfortable with. Most banks provide a loan calculator setting out how much you can comfortably borrow assuming different scenarios, such as starting a family or rate rises.

  9. Debt Repayment - Pay down as much as you can while rates are low.

  10. Best mortgage solution for your strategy - Regularly shop around for a cheaper mortgage. Lenders are competing for new business and will offer better rates for borrowers with a good repayment history who have built up equity in their property. There are plenty of mortgages around with headline rates below 2 per cent. Ensure you get the best possible mortgage solution, It is not just about the cheapest interest rate.

  11. Outline your debt repayment strategy – ensure you have another strategy rather then repaying your mortgage over 30-40 years! Consider, debt recycling, additional mortgage repayments, increasing the frequency of repayments (to name a few).


While COVID-19 has generated some significant headwinds we’ve also seen new opportunities emerge.

We consider that property remains an important cornerstone of a well-balanced investment portfolio.

Matthew McCabe