The housing market may look pretty fizzy right now but is it going to pop? Plenty of mortgage-holders in NSW and Victoria certainly face an uncertain future.

Residz Team 9/20/2021 8:05:16 AM 4 min read

The housing market may look pretty fizzy right now but is it going to pop? Plenty of mortgage-holders in NSW and Victoria certainly face an uncertain future. Since July 14,500 Australian home mortgages have been deferred, says an Australian Banking Association report.

The Property Expert International co-founder Robert Klaric has also indicated that the current hyped-up property market can’t last forever. In fact, he says that “mortgage stress brought on by COVID constraints together with the fear of future interest rate rises might impact house prices sooner than many pundits are predicting”. He further comments that “many homebuyers are maximizing their loan commitments merely to get into the market which leaves little if any room for job losses or rate rises”.

According to the Australian Financial Review, around three-quarters of calls to ANZ bank for home loan assistance have come from NSW customers in the wake of the Greater Sydney lockdown.

It shows how desperate the situation must be for many. As we’ll see, it also may be a signal to buy carefully.

It’s getting tough out there

After the avalanche of deferrals in 2020 it was clear banks were going to agree to them only as a last resort. Deferrals reached a peak of 900,000 in June 2020, although 50% of loan payments resumed in September.

Now it again appears many mortgages are either on approved repayment hold, paying lower than the minimum required, or are in default.

Paying the piper

Whatever the case, these loans are still accumulating interest charges and at some point the piper (bank) must be paid. While the interest rates are low right now, the amounts being borrowed are not. The average home loan in New South Wales is $752,490, in Victoria $608,958, in Queensland $467,316, in Western Australia $437,650, in South Australia $404,807, in Tasmania $376,726, in the ACT $593,204 and in the NT $372,378. You can test the effect of a mortgage holiday using a mortgage deferment calculator:

In light of this mortgage distress, could there be a rush of people selling up in the next couple of years?

High mortgages, low appeal

If so, the ones more likely to sell will be those carrying mind-boggling mortgages for homes in more marginal areas (eg. with fewer amenities, on busy roads or highways, with higher numbers of people losing their jobs, more crime, poor school results, etc.).

Property values may stop rising in these areas, and potentially fall. Property that stubbornly refuses to rise in value isn’t very common right now. While potentially good for first home buyers, it will be very troubling for people who are buying in at high prices expecting their equity to build over time.

This could represent a lot of homeowners. The lack of housing stock has pushed desperate buyers to borrow big amounts to buy poor homes in less desirable areas.

According to a July RBA survey, 68% of the expert respondents believe that first home buyers are being forced to compromise on their home due to fear of missing out in the property market.

Counting down the days

At present, owners in less desirable areas may simply be waiting for the market to go higher before they sell. In this hot market, each day can be worth up to $1100 (see chart below). However, any sign the market looks to be topping out might see stretched homeowners looking to cash in and clear their mortgage.

So what would happen if people struggling with mortgage repayments rushed to sell as they once rushed to buy? How lumpy would the sell-off be? Would there be pockets where housing stock becomes less desirable as a result? And, will prospective buyers more vigorously research crime statistics or school results of areas before they borrow heavily?

With new tools like Residz.com, buyers can now scan neighbourhoods before they complete a home purchase, getting a clearer picture than ever before of factors with the potential to lift or sink house prices.

Vulnerable Aussies increasing

Finder home loans expert Sarah Megginson is quoted as saying the financial impacts of COVID-19 has left many Australians vulnerable.

"Over the past 18 months, so many Aussies have seen their financial reserves drained," Ms Megginson said at Finder. "There's a real chance that further economic shock could lead to more people falling behind on their mortgage payments."

If this sounds a bit like your situation, speak to your bank or financial institution as early as possible. The Australian Banking Association has suggestions for home buyers who can’t make repayments:

Restructure the loan.
Convert to interest-only payments for a period of time.
Extend the loan term.
Or, on a case-by-case basis some further deferrals could be granted.
Speak to a financial advisor if in severe financial difficulty.

According to Mortgage Choice, in general, your lender will try to work with you and help you through rough times - since it's also in their best interest for you to get back on your feet, rather than default on your home loan.

Conclusion

In the current property boom of windfalls, it’s hard to imagine a situation where properties fall in value. But it wasn’t that long ago this happened with loan defaults in mining towns across Australia.

After borrowing a record $48 billion for housing in the first four months of 2020, Australians took loans worth $75 billion between January and April this year, according to ABS data. How many of those are in some sort of distress, and that may preface a sell-off at some point, remains to be seen.

Discerning buyers logged into Residz could start looking at areas where any sell-offs might occur. As a result, they may avoid buying a property that may well lose value over the next five years, or have some chance of buying a more affordable property.

Image source: https://www.flickr.com/photos/mikecogh/22787539912/

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