For the first time in the last 11 years, the Reserve Bank of Australia (RBA) raised interest rates last May 3, with projections for further increases within the year. This is in response to escalating inflation. The entire country is now interested to see how this affects home prices.
Homeowners will want to know if they will lose value from their homes and how much. Massive increases in Australia’s home prices were unprecedented in the past two years. It reached a peak of 35 per cent over prices before the pandemic. This boosted the wealth of homeowners but made it difficult for many to buy a house.
Potential home buyers will want to know whether a house and land will now be more affordable. That will depend on how far the increase in interest rates will bring down prices. Any price decrease must also be weighed against the corresponding increase in monthly mortgage payments.
Other factors will also come to play. Unemployment is still low. Wages are rising up from the lowest point in December 2020. That means people have more buying power now and more leeway.
The Four Big Banks Weigh In
All four banks see home prices falling in 2022 or 2023. Westpac has the steepest dive projection at 14 per cent through the last month of 2024.
ANZ is next, with a projected 11 per cent decrease. It expects three per cent of that to occur this year and eight per cent next year.
Commonwealth Bank expects home prices to plateau this year and then dip in 2023 by eight per cent.
NAB sees the lowest decrease, with a surprising prediction of a three per cent increase first this year before falling by 10 per cent next year. That would make it a seven per cent decrease overall.
Other Challenges in the Sector
The construction industry has been reeling from many challenges. Despite the high demand for homes, companies could not keep up.
Costs of materials have been spiralling upward during the pandemic because of production stoppages caused by Covid-19. It has also been affecting logistics and the delivery of materials. Adding to the pandemic difficulties is the tension between Australia and China. The war between Russia and Ukraine has also caused fuel prices to soar.
Construction companies with fixed-price contracts have been spending over their budget and losing money. Some have closed shop, leaving unfinished projects.
Demand Will Stay High
The construction industry has not yet caught up with the backlog in demand. Yet, analysts see even higher demand to come.
Updates in government incentives for first-time home buyers will benefit more people. The Home Guarantee Scheme will be expanded to accommodate 35,000 people from the previous 10,000. It allows approved home buyers to pay as little as five per cent in deposit instead of 20 per cent. This immediately removes one of the biggest hindrances to home buying.
Also, effective July 1, price caps on homes to be purchased under the Scheme will be increased. This can be by as much as $250,000, depending on the location. That means home buyers will have more home choices.
Separately, the Help to Buy shared equity scheme will be available even to Australians who already purchased a home previously but do not own a home now. It also lowers the deposit to two per cent. Approvals are, however, limited to 10,000 people a year.
In the shared equity scheme, the government loans the buyer 40 per cent of the cost of a new home or 30 per cent of the cost of an existing home. The buyer only has to pay for this if the house is sold. Otherwise, the buyer only has to pay for the remaining balance of the home price.
The caveat is that the government co-owns the property. The buyer still has the option of buying the government’s share, though, in increments of five per cent. That opens up the possibility of full homeownership.
By lowering the deposit to two per cent for both schemes without the need to get Lenders Mortgage Insurance, buyers get to save up to $30,000. This makes buying a home much more affordable for many.
Interest from Foreign Buyers
Experts also expect immigrants from other countries to add to the demand as Australia reopened its borders. The highest increase in the number of searches for property to purchase in Australia comes from India, at 94 per cent in the first quarter of 2022 compared to 2021. Searches from New Zealand showed an increase of 33 per cent from March 2021 to 2022.
Other countries that also showed a growth in such searches in the double-digits are Taiwan, the Philippines, Vietnam, and Indonesia. The most searched area is the Gold Coast, followed by all capital cities.
Opportunities are Rife
The Australian real estate market continues to see a high demand for homes. The government is incentivizing home buying with schemes and expansions to existing schemes. Additionally, foreign buyers are showing interest in the market. Despite increases in interest rates, it looks like the market will stay healthy. It now up to construction companies to rev up to meet this demand.