A decade of tailwinds for property is about to come to an end. From 2011 we've not seen an interest rate rise here in Australia, just rate cuts. One after another, after another. And then there was the RBA's $2B Term Funding Facility, which enabled the banks to give out dirt cheap short term (2-3 year) fixed rate loans. By mid-2020, people could borrow money for the purpose of buying a house at under 2%. At those crazy low interest rates, of course they can borrow much more on any given income, than at any time in the past decade, but certainly much, much more than say in 2008, when variable mortgage rates almost hit 10%.
And that ability to borrow more and more at lower and lower interest rates over the past 10-12 years has meant that few borrowers have run into trouble on their mortgage repayments. Save for the ones who borrowed on interest-only arrangements and saw that interest-only term end after which they had to switch to principal & interest, or those who lost/saw a decrease in household income, the majority of borrowers out there who've taken on way too much debt and who would have defaulted if monetary policy settings were more normalised, have been able to maintain ownership of their property thanks to the prevailing loose monetary policy settings.
What's funny is that the so-called 'experts', (i.e. those with vested interests) or otherwise those with no fkn idea, paint this picture as one of 'affordability'. The fact that borrowers can go out there and take on such large amounts of money that they will only ever pay back if they are content to work for the next 30 years or longer, is painted by these muppets as an affordable and even desirable scenario. The RBA governor, Phil Lowe, after cutting interest rates several times within a few months after the May 2019 election, even made the statement in late 2019 that 'now is the time' for first home buyers to go out and make their first property purchase. At the same time he said (virtually promised) that interest rates would not go up until 'at least' 2024. Both very irresponsible statements.
Then came COVID in early 2020, and listed markets (i.e. stocks) got crunched for about 5 weeks, while the residential property market just stood still, as everyone sat on their hands (i.e. shat themselves). In late March 2020, further rate cuts coupled with enormous stimulous packages announced by governments everywhere saved all markets, shares and property included. It wasn't some miracle, nor some force-field around property that made it a bullet-proof investment. If you believe that, you're an idiot. Had they not given out free money, handouts like JobKeeper and JobSeeker, and also deferred mortgage repayments (even for investors/landlords ffs!) for, in some cases, up to 18 months, borrowers would have been forced to sell, thus increasing market supply, and property prices would have collapsed.
With 2020 ending and what we thought was the worst now behind us, January 2021 saw the stupidity switch flicked on. Investors, comfortable in the knowledge that a calamity was averted in 2020, became complacent (I would say reckless) and started to bid up asset prices everywhere. Shares, property, crypto, used cars, other collectibles - you name it, it all went crazy in 2021. You can't shove truckloads of free money into peoples' hands and expect that they'll save it for a rainy day. Most will either spend it, or 'invest' it (speculate with it) somehow. There is too much money (demand) with too few places (supply) to put it. Hence prices went up, and fast. Everywhere. Goods and services.. investment assets... their prices all went up.
Which brings us to 2022. A very different year already. Price inflation is running rampant all over the globe, as many intelligent commentators had predicted it would 12 months ago. And the only way to bring down price inflation, is to curb demand. And how do you do that? By stopping the free handouts and making borrowed money more expensive, that is, increasing interest rates. It's not a matter of if but when now.
Of course, in theory, we have a very well regulated banking system in Australia, so we should be able to withstand rate rises, right? There were healthy buffers in place, not allowing people to borrow exorbitant amounts of money that they couldn't afford. So borrowers should be comfortably able to withstand 8-10 rate increases of 0.25% each - say a total 2.5% increase in rates from here. They should... But in practice, when research suggests that more than 40% of all loan applications last year contained falsified financial information, it might not be that simple... Just a couple of rate rises might be enough to force those who borrowed too much to sell, which will increase supply and in turn have a profound effect on house prices.
Christopher Joye (ex-RBA and now market commentator, who by the way, predicted property would go up substantially in mid-2020 when everyone else thought it would drop) knows the effects of macroeconomic policy better than most in Australia, and believes four rate rises will cause a 15-25% drop in property prices across the board.
One thing is for sure. I'd rather be holding paid off assets with little-to-no debt right now, than having hundreds of thousands or millions in outstanding loans.
