The end of many borrowers’ fixed-rate loan term in 2023 is expected to present a significant challenge for real estate values, according to a new report.
Valuation firm Herron Todd White’s (HTW) final Month in Review report for 2022 said that while several market indicators like auction clearance rates and listing numbers remained relatively stable at the end of the year, a surge in refinancing activity would test the market during the first half of 2023.
“…around 23 per cent of all home loans were fixed over the past couple of years and are due to convert to variable by the end of 2023,” wrote Drew Hendrey, executive director of valuation and advisory at HTW.
“The peak of these for most of the major banks seems to be Quarter 1 or Quarter 2 [of 2023].
“Worryingly, most of these conversions are facing a three to four per cent rate increase. There will be a legitimate strain on households and potentially an increase in distressed sales.”
It was unclear how borrowers would cope with the rise in rates, Mr Hendrey wrote, given that many had their loan applications assessed against a lower serviceability buffer.
“Also worryingly, a proportion of homeowners who borrowed and fixed at the lowest levels may find themselves paying more than what the serviceability buffer had factored in at the time. The higher rates go the more magnified this becomes.”
While there had little evidence of any rise in distressed borrowers so far, the prospect of an increase in defaults could weigh on larger markets in 2023.
“While we have not observed any significant month on month change to mortgagee in possession volumes, an increase in default activity early next year could have an adverse impact in some markets, especially those exposed to purchase activity at the peak of the market over the past 12 months,” Mr Hendrey wrote.
But borrowers who had been able to get ahead on repayments during Covid lockdowns would like be isolated from mortgage pain.
“Fortunately, according to the ANZ, fewer than one per cent of mortgages are in arrears and 70 per cent of its book is ahead on repayments. More than 40 per cent are 12 months or more ahead,” Mr Hendrey wrote.
“Savings are healthy and unemployment is very low. On top of all that, net overseas migration is back to levels not seen since the early 1980s.”
While many property industry members had been hoping for a less chaotic year following two years of pandemic-related disruption, several developments had presented a significant for the market in 2022, HTW CEO Gary Brinkworth said.
“There had been an expectation rates would remain on hold until closer to 2024 – but the monthly upticks in the cash rate from May through to year’s end took all the steam out of markets,” Mr Brinkworth said.
“There is no doubt that the impact of eight consecutive interest rate increases since May has resulted in the spring selling period being non- existent and the residential market in decline. Most markets however are still above pre-pandemic levels.”
Political and international developments had also conspired to create turbulent selling conditions.
“Throw in a few other significant events this year such as the entrenched war in Ukraine, political turmoil in the UK, continued pandemic challenges and, of course, the election of a new federal government in Australia. All of these have repercussions for consumer confidence and the national economy, and the consequences have played out in real estate values.”
The report from HTW also identifies where markets throughout Australia are at within the property cycle.
Property clock – Houses
Peak of market: Albany, Barossa Valley, Bathurst, Canberra, Dubbo, Mildura, Mount Gambier
Newcastle, Shepparton, South West WA, Sunshine Coast, Tamworth, Toowoomba.
Starting to decline: Adelaide, Adelaide Hills, Albury, Broome, Burnie/Devonport, Central Coast, Coffs Harbour, Geelong, Gold Coast, Hobart, Launceston, Melbourne and Wodonga.
Declining market: Ballina/Byron Bay, Brisbane, Illawarra, Ipswich, Lismore, Southern Highlands and Sydney.
Approaching peak of the market: Alice Springs, Bundaberg, Cairns, Darwin, Fraser Coast, Geraldton, Kalgoorlie, Mackay, Perth, Port Hedland.
Rising market: Emerald, Esperance, Gladstone, Karratha, Rockhampton, Southern Tablelands, Townsville and Whitsunday.
Start of recovery: Southern Tablelands
Property clock – Units
Peak of market: Albany, Bathurst, Brisbane, Burnie/Devonport, Ipswich, Mildura, Mount Gambier, Newcastle, Shepparton, South West WA, Sunshine Coast, Tamworth, Toowoomba
Starting to decline: Adelaide, Adelaide Hills, Albury, Barossa Valley, Central Coast, Coffs Harbour, Geelong, Gold Coast, Hobart, Launceston, Melbourne, Wodonga
Declining market: Ballina/Byron Bay, Canberra, Illawarra, Lismore, Southern Highlands, Sydney
Start of recovery: Southern Tablelands
Rising market: Broome, Cairns, Darwin, Dubbo, Emerald, Esperance, Geraldton, Gladstone, Karratha, Mt Gambier, Rockhampton, Townsville and Whitsunday
Approaching peak of market: Alice Springs, Bundaberg, Fraser Coast, Kalgoorlie, Mackay, Perth, Port Hedland
