Hopeful home buyers are preparing for lower interest rates as early as next week by arranging financing in larger numbers, with real estate agents hoping the Reserve Bank of Australia will unleash a surge in transactions after a slow start to the year.
The number of mortgage applications, a forward-looking indicator, rose 2.7 per cent in the past three months of 2024, according to Equifax, an analytics company that tracks credit and borrowing data.
But Mark Bouris, executive chairman of Yellow Brick Road Home Loans, along with some economists have added a dose of caution to hopes for a big housing rebound, spurred by a rate cut.
“I don’t think that there’s a big floodgate of demand about to open,” the veteran lender told The Australian Financial Review.
“Sure, the rates might come back and you might get a $60 reduction on a monthly payment, but the cost of living has also gone up high. So it’s not just the interest rate that went up but the cost of living as well, and that made it really difficult for home buyers.
“We’re not seeing pent-up demand. We’re writing pretty good business, around $2.1 billion a month, but we don’t have a big backlog of people who might qualify after the rate cut.”
Nevertheless, the uptick in mortgage applications – which includes refinancing – shows home buyers and owners are feeling more confident in the economy and in their own financial situations, according to Kevin James, Equifax’s general manager of advisory and solutions.
“There’s certainly a bit more positivity and confidence in the market, and we’re expecting mortgage demand to rise this year if rates fall as expected,” he said.
Pascal Butler, a Melbourne-based property investor, is among those who are feeling upbeat about the housing market. He recently took out a mortgage to buy his second investment property, expecting that lower interest rates would boost prices.
He and his partner Georgia are about to settle on a four-bedroom house they bought for around $750,000 in Melbourne’s north-west.
“I think there’s a lot of upside with interest rates dropping, particularly in Melbourne which has been weak for some time,” he said. “More first-home buyers will be able to get into the market and target the affordable suburbs, such as the one where we bought our property.
“We were able to buy a good property for a reasonable price in an area relatively close to the CBD because there were fewer buyers. But I think it will be harder to find those as rates drop and more buyers come in.”
However, while lower rates will boost buyers’ sentiment, it will unlikely unleash massive demand, says Shane Oliver, AMP chief economist.
“The rise in mortgage applications is relatively small in the grand scheme of things, so yes, there is pent-up demand out there, but it’s not as deep as normally would be the case coming into a low-interest-rates environment,” he said.
“Housing affordability has not improved despite higher interest rates and buyers are still constrained with lower borrowing capacity.
“Those obstacles may curb buyer demand compared to the past rate-cutting cycles after the initial bounce.”
The latest ABS lending data shows total lending rose by 7.2 per cent in the December quarter, compared with the previous year, led by investor loans which surged by 13.2 per cent, although they posted a dip over the quarter.
Dr Oliver said those numbers were still lower compared with the previous rate-cutting cycle, indicating weaker demand.
A rebound in demand is particularly crucial in the current market where listings are rising faster than buyers could absorb them, sparking a downturn in Sydney, Melbourne and Canberra and slowdown in the other capitals.
While the country is grappling with the fundamental housing shortage of about 200,000 homes nationwide based on population growth and building completions, according to Dr Oliver’s estimate, this will not all translate into buying demand,
Government programs such as Help to Buy, and the recently announced rule change allowing banks to exclude HECS debt repayments from mortgage serviceability tests when assessing borrowing capacity, could help some home buyers break into the market, but the impact may be limited.
Tim Lawless, CoreLogic’s research director, said poor affordability, lower borrowing capacity and higher costs of living will still make it harder for some home buyers to enter the market.
“The biggest difference in what we’re seeing in the marketplace now, compared to the rate cuts during the pandemic, is that there are a lot more barriers to being active in the market,” he said.
“It’s a lot tougher for the mainstream buyer to participate in the market, both from the affordability and serviceability perspective, given how much borrowing capacity has fallen and the fact that lenders are generally quite cautious on their lending policies as well.”
Housing affordability nationwide has worsened in the past year as house prices largely defied 13 interest rate rises since May 2022.
House prices are now eight times higher than income, the highest since June 2022 and above the decade average of seven times income, according to ANZ.
Property values had jumped 38 per cent nationally since the COVID-19 pandemic, pricing out many aspiring home owners.
Only 10 per cent of the country’s housing market was affordable to middle-income households as of September last year, while just half were accessible to the top-earning households.
Arjun Paliwal, head of research at buyer’s agency InvestorKit, said any build-up in buyers’ demand will be slow and gradual.
“First, there will be an improvement in sentiment and those who can afford will start to make a move, but this will not be broad-based, so we’re not suddenly going to see a boom in house prices,” he said.
“For some buyers, they will have to wait until rates drop enough to allow borrowing to increase before making a move.”
Matt Lewison, chief executive of property investment advisory firm OpenCorp, agreed that a rate cut would not immediately spark a large-scale return of buyers.
“An interest rate reduction might improve borrowing capacity, but it doesn’t mean another 30,000 people will go out and start shopping for property,” he said.
“Typically, buyers would jump in once prices start to move, but that takes three to six months to happen, from the day of the rate cut. So there will not be a rapid increase in demand, but we’re expecting buyer activity to increase by the end of the year.”
(Fin Review – February 2025) If you would like assistance with a home loan health check, purchasing property or refinancing, or to discuss any other lending needs, please do not hesitate to contact Geoff.
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