Financial guru Scott Pape has warned Australia’s housing bubble is set to burst, and Australians ‘wouldn’t want to be up to their eyeballs’ in mortgage debt when it does.
Pape, better known as The Barefoot Investor, noted in his blog interest rates which are at record lows ‘will rise and when they do, they’ll burst the housing market bubble’.
Australian house and apartment prices have risen dramatically, with a 22.2 per cent increase in the year to November marking the fastest annual surge since 1989.
Property values are growing at ten times the rate of wages growth.
Housing prices have surged up 22.2 per cent in Australia in the year to November with tough competition for buyers to secure a house (stock image)
CoreLogic data showed the national value of homes had increased for 14 consecutive months, with the average median value increasing by $126,000 in the last year.
Australia’s median property price of $698,170 is now so dear an average, full-time worker earning $90,329 would be in mortgage stress, even with a 20 per cent mortgage deposit.
That’s because the Australian Prudential Regulation Authority, the banking regulator, considers a debt-to-income ratio of six of more to be dangerous.
In Sydney, house prices have surged by an even more dramatic 30.4 per cent in the year to November, taking the mid-point to a very unaffordable $1,360,543.
In his blog, Pape answered a question from a reader who asked why they were finding it so hard to buy a house.
‘My fiancé and I both earn good money. We have a healthy deposit and budget and want to buy so we can start a family,’ the reader said.
‘We’ve offered more than they were asking and been told no, the vendor took a cash offer instead.
Barefoot Investor Scott Pape (pictured) said the housing bubble would burst and Australian should be wary of borrowing too much on their mortgage
‘I obsess over realestate.com, ringing as soon as something comes up, only to find it was sold while waiting to be uploaded to the site.’
They added they have rung real estate businesses for help and told them they are pre-approved first home buyers, but the agents just don’t call back.
‘The dream of owning your own home must be feeling like a heart-crushing unlikelihood.’
Pape responded by telling the reader not to give up and that he believes the housing market bubble will eventually burst – and with it housing prices will drop.
‘I have no crystal ball, and picking short-term economic moves is a mug’s game,’ Pape said.
‘Yet it gets clearer when you zoom out.’
He explained in 1990, official interest rates set by the Reserve Bank were at 17.5 per cent, and they are now at a record low 0.1 per cent.
The RBA made them this low partly to offset the financial impacts of border closures and lockdowns and keep the economy chugging along.
Interest rates being low encourages people to borrow more money and therefore sellers can ask – and get – more for their properties.
Competition between buyers drives the prices up further.
But as interest rates rise, the growth in house values will taper off as credit dries up.
And the borrowed money still has to be paid back, likely at higher rates of interest.
Pape said he asked his eight-year-old son where interest rates would go and he replied: ‘Up, they can’t get that much lower’.
‘So when interest rates rise, and they surely will, it’ll be brutal for many people who’ve borrowed too much,’ Pape said.
‘I can’t tell you when that will be … the only thing I can say with great certainty is that you don’t want to be up to your eyeballs in debt when they do.’
The property markets in Sydney and Melbourne are slowing, although still in positive growth, while the Brisbane and Adelaide markets are going strong (stock image)
CoreLogic’s research director Tim Lawless said it was already evident that the pace of growth is slowing.
‘Virtually every factor that has driven housing values higher has lost some potency over recent months,’ he said.
‘Fixed mortgage rates are rising, higher listings are taking some urgency away from buyers, affordability has become a more substantial barrier to entry and credit is less available.’
Across the capital cities Sydney and Melbourne have experience the slowdown more sharply than the housing markets in Brisbane and Adelaide which are still going strong.
Hobart, Sydney and Brisbane had the biggest value increases in the last 12 months of 27.7 per cent, 25.8 per cent and 25.1 per cent respectively.
While Perth at 14.5 per cent and Melbourne at 16.3 per cent had the smallest growth.
Reserve Bank of Australia Governor Philip Lowe has hinted the cash rate, now at a record low of 0.1 per cent, could rise in 2023 instead of 2024 as earlier promised.
The major banks are forecasting a rate rise in 2022, with none of the big four lenders offering fixed mortgage rates of less than two per cent.