‘Bleak’ outlook for first home buyers in Australia but much depends on how re-opening is managed

Aussie properties are being sold for “stupid” amounts and the outlook is bleak for first home buyers. One factor could make it even worse.

The outlook for first home buyers is looking “pretty bleak” and much will depend on how Australia handles its border re-opening.

AMP Capital chief economist Shane Oliver says price increases are starting to slow and values may even fall at the end of 2022 or 2023 but this could depend on immigration.

Property prices in Australia have already grown by about 21 per cent this year and housing affordability in Sydney has deteriorated to its worst level in a decade.

This has led to “stupid” prices being paid for some properties, with many home buyers now faced with huge mortgages that will take decades to pay off.

However, increases to fixed rates and the lack of affordability are beginning to slow things down.

“2022 will probably be a transition year from the strong price growth of 2021, to more moderate growth,” Mr Oliver told news.com.au.

“We are already seeing a slowing in gains from about 21 per cent (earlier this year) to probably about 7 per cent and slowing as we go through the year.

“By the end of 2022/23, I think prices will be falling.”

However, Mr Oliver doesn’t believe the price falls will be significant if previous downturns are any guide.

“You might see a 5 per cent fall but you won’t see a collapse,” he said.

He said prices had fallen during the global financial crisis in 2008, around 2011 and 2017/18. They had also fallen a bit last year.

“But the broad trend has been up, the falls have been around 5-10 per cent but the price gains have been much more.

“I think what we’ll see is a cyclical downturn in 2023 — I’m not assuming there will be a crash or anything.”

House prices in Australia have continued to rise despite the pandemic. Picture: Phoenix Naman

Some banks have already begun increasing fixed interest rates, which will impact new buyers and how much they can afford to spend. This will make it even more difficult for some to get a mortgage.

Mr Oliver said banks looked at whether appplicants could meet repayments if interest rates were 3 per cent higher than the current rate, so a higher rate meant more people would be ruled out.

“These are small moves but they will knock out buyers at the margin,” he said.

People who already have mortgages won’t feel the impact of this but once variable rates also start going up, they too will begin to feel the pain.

“For people who have locked in (their interest rates) at 2 per cent for the next few years, they should try and get their mortgage down as quickly as possible if they can,” he said.

Will the border re-opening boost prices?

The re-opening of Australia’s borders from November 1 could also see prices in better-off suburbs get a boost but Mr Oliver doesn’t believe it will be a “gamechanger”.

Mr Oliver said most people coming in from overseas this year would be returning Australians and this probably wouldn’t have a significant impact, except in certain areas.

“They will probably want a better lifestyle so places like (Sydney’s) northern beaches, eastern suburbs and north shore to some degree, will get the best gains,” he said.

“Presumably they are high income earners — so it might support prices in better off suburbs.”

What about when international students return?

Mr Oliver said if housing demand was properly managed once borders were open, and Australia did not go down the path of high immigration as some states like NSW are advocating, then Australians should be able to look forward to a more affordable future.

He said making it easier for people to relocate to more affordable regional areas as well as making the supply of housing smoother could help.

“There is light at the end of the tunnel but the government needs to encourage this,” he said.

“A lot is riding on how well the re-opening is managed. Immigration has made Ausstralia better but we need to make sure it’s been matched by housing supply.”

The return of international students and other migrants next year will probably make the most difference to units in inner city areas of Sydney and Melbourne as it will drive demand for rental properties.

This will likely push rents up and attract investors to these properties again.

“This could play out over a year or so,” Mr Oliver said.

“A lot depends on immigration levels and how quickly they come back but the big factor driving prices — interest rates — has done its dash and is probably over.”

The undersupply of new dwellings has also been reversed, with an oversupply present in some area that should also help affordability.

“In theory this could improve affordability but this depends on immigration,” Mr Oliver said.

“It it takes off or becomes even higher, that oversupply could quickly turn to undersupply.”

Why did prices rise during the pandemic?

At the beginning of the pandemic, some analysts were predicting large falls in house prices but while there was a short downturn, this quickly reversed once lockdowns were eased.

Prices for this year are now expected to be around 21 per cent higher.

Mr Oliver believes this may be because Australia went into the pandemic with an undersuppy of housing and low interest rates.

Incentives including the First Home Loan Deposit Scheme and the New Home Guarantee also encouraged first home buyers into the market.

“We’ve had a combination of low interest rates, incentives and Fear of Missing Out (FOMO),” he said.

“It is pretty bleak that housing is so expensive and that prices have become stupid in some areas.”

Prior to the pandemic it was already difficult for young people to get into the market but now they will be taking on even bigger mortgages that will take longer to pay off.

“It seems grossly unfair that the country has allowed this situation to develop, especially with so much spare land around,” Mr Oliver said.