Rate rise threatens Australia’s booming housing market

More than 50 years ago, James and Norma McCarthy built their “beachcomber” home overlooking Macmasters Beach, 90km north of Sydney, despite friends and family warning them they were mad to invest in such an unfashionable location.

“Money was pretty tight. They were frugal,” explained Kathryn McCarthy, reflecting on her parents’ bet to build a house at the end of a dirt track.

Since then, three generations of the McCarthy family have enjoyed countless summer holidays at the beach house. But the boom in Australia’s property market has transformed formerly sleepy towns such as Macmasters Beach into sought after areas, particularly since the pandemic encouraged buyers searching for more space to hunt beyond the city.

The rocketing property prices have enticed the McCarthy family to put the holiday home up for sale for the first time after their beachcomber was valued at more than A$3mn ($2.2mn). “The market is so attractive right now,” McCarthy, who lives in Sydney, said.

“The agents said they have never seen anything like this, especially around here. We are all very grateful they held on to it.”

Despite some weakness after the banking crises in 2008 and a dip five years ago, the Australian market has mostly defied expectations that the housing bubble would burst. The average price of a house has grown by 192 per cent over the past two decades, according to research company CoreLogic, making Australian property one of the strongest performing markets in the world alongside New Zealand, the US and UK.

Against a backdrop of strict lockdowns and border closures to keep Covid-19 at bay, 2021 was the best year to be a homeowner since the mid-1980s as prices rose 22 per cent.

Yet the prospect of higher interest rates this year threatens to reverse that trend with the housing market expected to slow abruptly in the second half of this year and next.

Economists have predicted a fall in house prices of up to 8 per cent next year with National Australia Bank anticipating a sharper 10 per cent decline — which would be one of the largest “peak-to-trough” market corrections in recent history — with steeper drops of almost 12 per cent seen in Sydney and Melbourne.

Tim Lawless, CoreLogic’s head of research, said there had already been subtle declines with Sydney’s market edging 0.1 per cent lower in February, the first negative movement in 18 months. “In the second half of this year, the consensus is that the market will start to move to the next phase,” he said.

Falling prices could help narrow a disparity at the entry level of the market. Lawless noted that the wage price index rose 2.3 per cent in 2021 compared with the 22 per cent rise in house values, which has made buying a property unaffordable for many Australians. “First-time buyers can’t get into the market,” he said.

According to the Demographia International Housing Affordability survey for 2022, Sydney trailed only Hong Kong as the least affordable city to buy a house. Melbourne was fifth on the list and Adelaide, Brisbane and Perth all featured in the top 20 most expensive cities.

The rapid rise in housing value — with many Australians panic-buying poorer quality houses, known colloquially as “bastard properties”, for fear of missing out — has highlighted the high level of household debt in the country. Household debt, as a percentage of gross domestic product, stands at about 120 per cent, second only to Switzerland.

That could leave many mortgage holders in danger of being squeezed by rising interest rates and inflation. Philip Lowe, governor of the Reserve Bank of Australia, was asked last month what mortgage holders — 1mn of whom have never experienced a rate rise — should do to prepare. “Make sure you have a buffer,” he urged.

Saul Eslake, founder of Corinna Economic Advisory, said that, at first glance Australians appeared “exceedingly vulnerable” to rising interest rates. However, the number of mortgages most at risk — those with a very high debt-to-salary ratio — remained relatively low.

Eslake added that default rates on mortgages in Australia were very low compared with other countries, which should guard against a housing market collapse.

“Australians are pretty shameless about many things [but] one thing which does carry a significant amount of social stigma in this culture is having a ‘mortgagee in possession’ sign go up outside your house,” he said.

Eslake cited a former RBA governor who insisted in private that “Australians will eat dog food before defaulting on their mortgages”.

Heavy rains in New South Wales have forced the McCarthy family to delay the auction of the family holiday home to early April. McCarthy said that they would go “back to the drawing board” if offers prove underwhelming. “We wouldn’t be doing the family justice otherwise,” she said.

Source: Financial Times