With interest rates low and prices expected to rise soon, it’s the perfect time to buy a house
You’ve no doubt seen headlines and read stories about declining property prices and accompanying economic downturn. It’s true that in 2018 alone property values fell by 7.8 per cent in Sydney and nearly the same amount in Melbourne. But there is ample reason to view this as an opportunity to buy a house now, especially as declines slow and signs point to a bottoming out of the market soon. With home prices still low but expected to rise in the near future, it’s a great time to invest in property.
Market Turn Coming
Property sales are down 35 per cent from 2015 levels, which in part means people who want to sell are not even listing their properties. But slowing declines and consumer optimism portend a market warmup. The Westpac-MI Consumer Sentiment Index for April revealed that the time to buy a house index rose to a four-year high and was 33 per cent from its low point two years ago. “Improving affordability continues to see a lift in buyer sentiment in New South Wales and Victoria, although, in both cases, there is still some way to go before buyer sentiment returns to long run average levels,” Westpac chief economist Bill Evans said at the index’s release.
Since then, the Reserve Bank has cut the interest rate on home loans by 0.25 per cent for the first time since 2016. “Buying a home is an aspiration for many Australians and for the first time, we’re seeing suburbs and towns in every state where it is more affordable to buy than rent,” ANZ home owners lead Kate Gibson said at the release of a study in conjunction with CoreLogic in June. “This shift, combined with record low interest rates, is driving more first home buyers to look at entering the market. For the first time in 15 years most buyers are not chasing a rising market.”
Darwin is the most affordable capital city to buy a house in, with it and Perth enjoying their highest levels of affordability for home buyers since 2004. In Darwin and north west Hobart, it’s actually less costly to buy a house than rent one. To no one’s surprise, Sydney and Melbourne are still the least affordable capital cities.
“The recent drop in property values follows a long period where prices increased at a much faster pace than household incomes,” CoreLogic head of research for Australia Cameron Kusher said. “We predict that price falls will settle later this year, followed by modest price growth starting from 2020.”
If Kusher is correct, buyers will see a quick return on their investments.
How Apartments Fit In
The ANZ-CoreLogic report lists 97 places around the country where it is cheaper to buy a house than rent one. These are mostly in regional areas, but Hobart saw a 7.1 per cent increase in rental prices over 2018, whilst household incomes have not kept pace. In larger capital cities, there is a glut of empty apartments built during the most recent housing boom that stand empty. Apartment rental vacancies hit 3.4 per cent in Sydney in May, according to SQM Research. That’s the highest level since 2005.
One factor driving this is foreign investors buying apartments and leaving them unoccupied, waiting for prices to go up so they can sell at a profit. “It’s like buying a gold bar,” SQM chief executive Louis Christopher told the ABC. “They’ll buy and hold and keep it shut for the whole duration of their ownership.” This practice limits the amount of available apartments for homeseekers, but it also shows the investment opportunity for homeseekers to purchase apartments in highly sought after areas. There will be more than 50,000 apartments built in Sydney since 2018 coming on the market soon.
Royal Melbourne Institute of Technology (RMIT) property expert Chris Eves thinks the market medium density apartments in prime areas will recover faster than high rises and cautioned not to wait too long. “Yes, the market might not have bottomed, but what we find is when the market turns, say, if it’s taken 12 months to go down, it increases very, very quickly once it starts moving up,” Eves told the Guardian. “Those people trying to wait for the bottom of the market tend to get caught out.”
The Mortgage Landscape
Of the big four banks, Commonwealth Bank and NAB have passed along the full 25 basis points of the Reserve Bank’s interest rate cut, whilst Westpac has passed on 20 basis points and ANZ Bank has passed on 18. Among smaller banks, ING, RACQ Bank, Athena Home Loans, and Reduce Home Loans are passing along the full rate cut. The 1.25 per cent interest rate is a record low, giving homeseekers loads of incentive to buy a house now.
Commonwealth Bank is also encouraging homebuyers to install rooftop solar, offering up to $500 cash back through its Green Mortgage initiative. “We are always looking for innovative ways to support our customers, which is why we are launching this new initiative,” Commonwealth Bank executive general manager for homebuying announced. “We understand many of our home loan customers could reduce their energy volume and usage, and pay less or become net positive for energy by investing in energy efficient devices.”
Regional Australia Bank offers an Enviro Loan and a Sustainable Home Loan with incentives for such home improvements as double glazed windows and rainwater storage tanks, as do Hunter United’s Green Home Loan and Bendigo Bank’s Green Home Loan.
To further entice buyers, particularly first-timers, some smaller lenders are offering 40-year mortgages. In exchange for a longer term to pay the loan off, the 40-year mortgages allow people to buy a house with smaller monthly payments than in a 25- or 30-year mortgage, though the extra time means more interest paid in the long run. Still, it can make the difference in being able to afford a home loan payment.
Whichever lender and loan type you choose, market conditions make now the time to buy a house or apartment.