Across Australia, first-time home buyers like Yolanda Zarins and Luke Andree are wondering if house prices will ever fall.
Since the birth of their first child Jannis 16 months ago, their downtown rent has felt too small.
“It was really quite stressful. We were looking for an apartment with a little more space and found we couldn’t really read the market,” says Andree.
At the national level, property values are up 22 percent in a year, although the pace of growth has slowed in recent months.
Ms. Zarins and Mr. Andree live in Hobart – the hottest real estate market in the capital in 2021. Prices there have risen by an incredible 27.7 percent in the last 12 months.
In Sydney the values rose by 25.8 percent, followed by Brisbane (+25.1 percent), Canberra (+24.5 percent), Adelaide (+21.4 percent), Darwin (+16.7 percent), Melbourne (+16.3 percent)) and Perth (+14.5 percent).
“What we’ve seen is the highest 12-month growth rates since 1989,” says Eliza Owen of CoreLogic.
“But as far as the full upswing is concerned, it has been going on for about 13 months.”
In 1989 Ms. Zarins became one. More than three decades later, a record annual price hike has excluded her young family from the real estate market.
“I think the emotional toll made us stop looking now,” she says.
What will house prices look like in the next year?
This is not good news for first-time home buyers.
Prices are expected to rise again in 2022 before falling in 2023 (though not enough to wipe out the gains from the current boom).
The NAB predicts property values will rise 4.9 percent in 2022 and decline 4 percent in 2023.
ANZ’s outlook is for a price increase of 6 percent in the next year and a decrease of 4 percent in 2023.
The Commonwealth Bank expects house prices to rise 7 percent over the next year and is forecasting the largest price decline for major banks in 2023 of 10 percent.
Westpac expects an increase of 8 percent in 2022 and a correction of 5 percent in 2023.
Bank interest rate hikes
Record low mortgage rates of less than 2 percent have fueled the real estate craze.
House prices are unlikely to fall until interest rates (which are pegged to money markets and the cash rate) rise.
The Reserve Bank of Australia (RBA) says it won’t raise the cash rate until inflation hits the target range of 2-3 percent.
However, some analysts are betting that the cash rate will increase in 2023, not 2024.
Banks have already started raising fixed rates while lowering floating rates to attract new customers.
That’s why RateCity’s Sally Tindall says borrowers need to be prepared for interest rate hikes in 2022.
“The cash rate is at an emergency level, from then on it will only rise unless there is a significant bump,” she says.
“Banks are focused on gradually raising interest rates, so borrowers must be willing to pay more for the money they borrow.”
What about the regions?
Thanks to city dwellers who escaped COVID-19 lockdowns, levels in the regions (30.4 percent) have surpassed those in the capital cities (24.6 percent).
“If you look at the regional market, it is the well-connected, commuting regions with good infrastructure and service provision that will continue to experience increased demand,” says Eleanor Creagh of the REA Group.
Lifestyle locations like Queensland are also expected to do well in 2022 as people continue to leave the states hardest hit by the COVID-19 pandemic.
In Brisbane, buying agent Wendy Russel has never been so busy, especially with customers off the freeway.
What about Omicron?
Some analysts warn that house prices could rise again in double digits next year if worst fears about a new variant of COVID – like Omicron – come true.
“The Reserve Bank of Australia would wait for any planned rate hike,” says Louis Christopher of SQM Research.
“And possibly the financial regulator APRA would also forego any additional intervention to restrict lending in the real estate market.”
Ms. Tindall says the advent of Omicron is a timely reminder that, despite the best predictions, we can never be certain of what is coming.
“It’s too early to say what impact this new burden will have on rates, but if borders continue to open and close, confidence will likely take a hit,” she says.
Will lending rules tighten?
In October, the regulator APRA lifted the interest buffer for the easement of mortgages.
Some analysts expect APRA to intervene again next year by setting a cap on credit-income ratios, which are currently at risky levels.
The regulator could also impose a limit on borrowers with a LVR of 80 to 90 percent.
Mortgage broker Angelique Zimmer says the changes have affected her clients.
The first home buyers will decline in 2022
“First-time home buyers started the year with a bang with a record number of first-time buyers, but this has been falling month after month,” says Ms. Tindall.
“I assume that it will continue like this.”
According to ABS credit indicators, the number of new loans from first-time buyers has decreased by 11 percent in a year.
But the amount they borrowed has increased 1 percent (because house prices are increasing).
The value of investor mortgages rose 83 percent.
Ms. Owen warns that the first home buyers to exit the market will further exacerbate wealth inequality.
“If you’re not in the real estate market and you’re just trying to save a 20 percent down payment, for example, real estate prices can really run away from you,” she says.
“And they did that for many first-time buyers last year.
High density living more affordable
With the gap between apartment and unit values increasing to almost 38 percent, high-density living will become more attractive in 2022.
“As affordability constraints weigh on demand, we could channel some more of that demand into the units sector in the coming year,” says Ms. Owen.
After watching house prices in cities and regions, Katie Dunne and Max Rogers decided to buy an apartment near Melbourne’s CBD.
“It’s probably three to five years as a stepping stone before we move on to the next step, with the ultimate goal of getting a home on the market,” says Ms. Dunne.
She has some advice for other people looking to get into the market.
For many hopeful first-time buyers, current property prices are already outside their budget.