Mortgage values fall from nutty 2020 high but new homebuyers are still feeling the pain | Greg Jericho

IMagine in November 2019, I looked at a crystal ball and predicted a global pandemic that we would still be fighting about two years later. Do you think it would be a good time to sell or buy a home?

You might have thought that the economic frenzy and the closing of borders to overseas travelers would signal bad news for the housing market, so it would be a good time to sell.

After all in November 2019, the market was very weak and house prices were barely growing. So maybe you decided to get the money before breaking down and laughing all the way to the bank.

If you do, you have clearly forgotten the mantra of Australia’s political class – the housing market must not falter.

And two years later in November 2021, the value of new mortgages is 64% higher than they were two years ago:

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A suite of economic stimulus measures from record low interest rates to the HomeBuilder program has prompted an increase in mortgages being taken out:

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While there was some slowdown in the growth of new mortgages during lockdown in NSW and Victoria, November saw a solid 6.9% recovery across the country, led by 9% in NSW and 7.9% in Victoria:

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All this indicates that home prices will continue to grow strongly at least in the first half of this year.

While fortunately mortgage growth has not been at the nutty levels observed in mid-2020 when the value of new mortgages rose by up to 160% over the previous year’s levels, current growth suggests that the annual rise in property prices will soon remain at 15% – 20% for some time:

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But fortunately, we have low interest rates, right? Well… for now.

As I noted last week, the market is highly anticipating a hike in interest rates this year (I must admit I’m less optimistic). But even so, lowering interest rates hasn’t improved affordability as much as you might expect.

Across the country, the average mortgage size has grown strongly during the pandemic.

Among eastern states, the average new mortgage has grown between 22% and 25% since November 2019, while in Tasmania it has increased 31%:

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This massive increase is not enough to overcome the decline in interest rates.

In New South Wales, the average mortgage in November was $769,459 – just over $156,000 than it was two years ago.

If you had taken out a 30-year mortgage in November 2019 of $613,334 and paid the then average discounted rate of 4.15%, you would have been paying $2,981 per month in instalments.

By contrast, if you took out a $769,459 loan in November of last year at a rate of 3.45%, your payments would be $3,434 per month — an additional $453:

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This is an issue of housing affordability. It is very good to talk about low interest rates, but if the principle increases to the point of nullifying the low rates, you will not be better off.

It is always worth remembering that lower interest rates help most of those who already have a loan.

Those who took out a loan in Sydney 10 years ago took full advantage of the lower interest rates – repayments about $1,000 lower – while the increase in house prices made newcomers less affluent:

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More importantly, those who have borrowed in the past two years will not benefit from lower interest rates – these are as low as they will ever have.

For first home buyers, the news isn’t that bad.

The overwhelming growth in mortgage volume has come from those selling their homes and likely buying a new one:

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But even here, the average mortgage for a first home buyer in NSW is up 16% ($82,362) since November 2019. That means an average of $173 more per month to pay compared to a first home buyer who took out a loan since two years.

And remember, that’s $173 additional. The average monthly payment in NSW for a first home purchase loan that pays a 3.45% discounted mortgage rate is $2,557 – or roughly $31,000 a year.

So, yes, lower interest rates make for better affordability than it would with higher rates. But these lower rates and financial measures in turn increase prices and thus affect mortgage volumes.

For new homebuyers, they always seem to take a beating either way.

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