What Will You Give up to Own Property?

It’s not only expensive avocados that can keep you from a mortgage anymore.

Gyms, daily lattes, high grocery bills, Ubers…they could all affect your chances of getting into a home. As the Daily Mail recently quoted:

Mortgage Choice CEO Susan Mitchell agreed, saying living costs were now “very much under the microscope” and included gym memberships, subscription television, grooming, Uber fares, tolls and parking. 

‘“Borrowers are advised to complete a thorough review of their bank account and credit card expenditure and think about cancelling any unnecessary ongoing costs that might be going under the radar, Ms Mitchell advised.

Things are getting tougher in the housing market. Not only because lenders are looking at applicant’s expenses much closer than they did before, but it also looks like lenders are reducing lending amounts.

By how much?

Well, a research analyst from UBS recently tried to calculate this. He looked at old home loan calculators from large bank’s websites. As he told Business Insider, for an owner-occupier with no existing mortgage debt, the borrowing capacity could have decreased by 10% since 2015.

For investors, the amount is much larger. Borrowing capacity reduced by about 20% for the same period.

Lending standards are tightening…and interest rates are increasing.

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Interest rates are increasing

The Reserve Bank of Australia has kept interest rates stuck at a low 1.5% for almost two years. Yet lenders are starting to raise interest rates.

Macquarie is the latest lender to raise variable mortgage rates, as the Australian Financial Review reported. They follow other small lenders like AMP, Suncorp and ME Bank among others as funding costs keep rising.

Macquarie Bank has joined the ranks of lenders lifting their variable mortgage rates, shifting the spotlight to the big four banks and how they may manoeuvre to protect profit margins.

‘A jump in funding costs is to blame for smaller banks and other lenders moving out of step with the Reserve Bank of Australia on rates.

‘But this time round it comes against the backdrop of a damning royal commission into the financial services industry, which among other things has uncovered questionable loan writing practices. Falling house prices in many states and tougher lending policies are also prompting concerns.

What could happen if rates rise?

According to a recent whitepaper by Mortgage Choice, a 2% rise in mortgage interest rates would have ‘a considerable impact on 79% of Australians’.

This is not even considering that a portion of mortgages that are interest only are adding principal payments in the next years.

The thing is, properties have seen large gains in the last 20 years, as you can see in the chart below from Corelogic. While they dropped by .8% in 2017–2018 financial year — the largest fall since 2011–12 — they had a 10.2% increase in the year before.

Annual change in National values 11-07-18

Source: Corelogic

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Meanwhile, wage growth has decreased in recent years, even with low unemployment figures:

Australia annual change in hourly rates of pay 11-07-18

Source: Trading Economics

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Is wage growth effecting the property market?

Stagnant wage growth is not an Australian-only problem.

As the OECD recently warned in a report, while employment is rising, wage stagnation is ‘unprecedented’.

For the first time there are more people with a job today than before the crisis. The employment rate in the OECD is expected to reach 62.1% by the end of this year and 62.5% in the fourth quarter of 2019…

Unemployment rates are below, or close to, pre-crisis levels in most countries. Job vacancies have also reached record highs in Japan, the euro area, the United States and Australia. The OECD unemployment rate is predicted to continue falling, to reach 5.3% at the end of 2018 and 5.1% the following year…

Wage growth remains remarkably more sluggish than before the financial crisis. At the end of 2017, nominal wage growth in the OECD area was only half of what it was ten years earlier: in Q2 2007, when the average of unemployment rates of OECD countries was about the same as now, the average nominal wage growth was 5.8% vs 3.2% in Q4 2017.

10 years on and we are still suffering the crisis’ effects…

Wages haven’t grown, but property prices have been rising. This has meant that households have had to take on more debt to get onto the property market.

Yet now the credit tap is closing.

Your salary can only stretch so far. So, if things stay the same, something will have to give.

If wage growth doesn’t pick up, we could see even more price drops in property.


Selva Freigedo,
Editor, Markets & Money

PS: Author and economist Harry Dent thinks the next economic upheaval is at our doorstep…and has a chilling warning for Australia in his new book Zero Hour. To claim your copy click here.

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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