Predicted mortgage cliff still feels like a mere furrow

Australians’ leap of faith with interest rates may not be the mortgage cliff so many tipped.

In January a property investment commentator wrote: “On our estimates, Aussie housing should register its worst cumulative loss in 42 years within two to three months.”

As at January, Sydney home values had plunged more than 13 per cent, while Brisbane had fallen 9.7 per cent and Melbourne 8.5 per cent.

The article’s author noted, “we are now 60 per cent along the road to hitting the lower bound of our projected loss (of a total peak-to-trough correction of 15 to 25 per cent).”

In February, a conga line of experts also predicted property’s demise in 2023, and many cited a PropTrack report that predicted another 10 per cent fall for Australian residential property over the course of 2023.

One of the reasons was the so-called “mortgage cliff” we would fall off when hundreds of thousands of homeowners migrated from low fixed-rate mortgages to higher variable-rate loans in 2023 and 2024.

I had a somewhat different view stating, “I have held the view all year that the mortgage cliff was more than likely a mortgage ‘gutter’ we’ll all step over.”

Predicting asset prices is never easy as your author is only too aware!

Despite the rising interest rates and diminished borrowing capacities, prices have increased.

Data from July shows an ongoing recovery in the Australian housing market, with property prices increasing nationally for the fifth consecutive month (in other words since March). National home values are now just 5.3 per cent lower than their April 2022 peak, while Perth and Adelaide hit record highs.

And now moderate price rises are expected to continue in the coming months. Much to the chagrin of those who forecast a historic slump, the Australian property market is now expected to witness consistent growth in 2023, and national prices are forecast to rise by up to 5 per cent.

This follows an already observed increase of more than 2 per cent since the start of the year.

Perth leads the forecast with expected price growth of between 4 and 7 per cent, according to a report by REA Group. This is followed closely by Sydney and Adelaide, where the property markets are predicted to rise by between 3 and 6 per cent. Brisbane is expected to see a more modest 1 to 4 per cent growth. Melbourne, on the other hand, is expected to experience slower growth, up to 2 per cent, with some speculating a minor dip by year end.

These forecasts are premised on the assumption that the Reserve Bank of Australia’s series of interest rate increases is reaching its zenith.

Cameron Kusher, the author of REA Group’s

report, highlights that the limited availability of properties for sale is playing a significant role in fuelling buyer competition and price growth.

Understandably, given forecasters have had such a poor outing recently, they’re less certain about the 2024 outlook. The cohort of fixed-rate mortgage borrowers who will see their loans, currently at around 2 per cent interest reset to approximately 6 per cent is a particular fly in their ointment.

Arguably surprised by the impact of a massive surge in immigration on housing demand, those hitherto bearish property forecasters now expect housing demand to remain robust over the next few years owing to – you guessed it – strong population growth.

Migration is expected to boost housing demand, with net overseas migration projected to stay above average over the coming years.

CoreLogic suggests this, coupled with low dwelling approvals, will contribute to a shortage in Australia’s housing sector. It is estimated that the sector will be undersupplied by about 175,000 dwellings by 2027, adding yet another factor supporting rising housing prices.

Some concerns, however, still linger. Rate rises to date have yet to impact the cashflows of an estimated 800,000 homeowners with mortgages who in the coming months will transition from low fixed-rate loans to much higher variable rates (I reckon the number of such mortgages is far less). I remain unconvinced by the mortgage cliff.

Now, Australia’s property market is expected to continue growing, despite facing high interest rates, a shift from fixed to variable rate loans, and benefiting from a persistent supply-demand imbalance, driven by migration and undersupply.

I have long suggested residential property owners and investors are a protected species. What really matters now has nothing to do with interest rates or mortgage cliffs.

To retain their protected status and ensure long-term price growth from current levels, the preservation of both market-determined income rates from rent, and current favourable tax treatments is essential.

If Victoria’s proposed rental controls or any of property’s enshrined tax advantages are toyed with, the impact will be much greater than what we saw from the RBA’s rate hikes.

Roger Montgomery is founder and chief investment officer at Montgomery Investment Management