Mortgage Growth Falls To Insane Highs, But New Homebuyers Are Still Feeling The Pain | Greg Jericho

Iimagine that in November 2019 you looked into a crystal ball and predicted a global pandemic that we would still be grappling with two years later. Would you have thought then that now would be a good time to buy or sell a house?

You might have thought that economic pandemonism and the closing of borders to foreign travelers would signal bad news for the housing market and therefore would be a good time to sell.

After all, in November 2019, the market was rather weak and real estate prices barely increased. So maybe you decided to grab the cash before a crash and laugh all the way to the bank.

If you have, you have clearly forgotten the mantra of the Australian political class: the housing market must not falter.

Thus, two years later, in November 2021, the value of new mortgages taken out was 64% higher than it was two years earlier:

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The series of economic stimulus measures, ranging from historically low interest rates to the home building program, propelled an increase in mortgage borrowing:

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While there had been a slight slowdown in the growth of new mortgages during the foreclosure in NSW and Victoria, November saw a strong recovery of 6.9% across the country, led by 9% in New South Wales and 7.9% in Victoria:

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Everything suggests that housing prices will continue to grow strongly, at least for the first half of this year.

Although, thankfully, mortgage growth is not reaching the insane levels seen in mid-2020, when the value of new mortgages rose 160% from year-ago levels, current growth suggests that the annual increase in real estate prices will remain around 15% to 20% for some time:

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But luckily we have lower interest rates, right? Well… for now.

As I noted last week, the market expects interest rates to rise this year (I must admit I am less bullish). But even still, lower interest rates have not improved affordability as much as one might expect.

Across the country, the average mortgage size has risen sharply during the pandemic.

Among the Eastern States, the average new mortgage has increased between 22% and 25% since November 2019, while in Tasmania it has increased by 31%:

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This massive increase is not enough to overcome the drop in interest rates.

In New South Wales, the average mortgage in November was $769,459, just over $156,000 higher than it was two years earlier.

If you had taken out a 30-year mortgage in November 2019 worth $613,334, paying the average low mortgage rate of 4.15%, you would have paid $2,981 per month in repayments.

On the other hand, if you had taken out a loan of $769,459 in November of last year at an interest rate of 3.45%, your repayments would be $3,434 per month, or $453 more:

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This is the issue of housing affordability. It’s fine to talk about low interest rates, but if the principle has risen to the point of reversing the rate cut, then you’re no better off.

It’s always worth remembering that lower interest rates help most people who already have a loan.

Those who took out a loan in Sydney 10 years ago have absolutely benefited from lower rates – their repayments are around $1,000 less – as rising house prices have meant new entrants are less well off:

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And crucially, those who have taken out loans in the past two years will not benefit from the rate cut – it is the lowest they will ever get.

For first-time buyers, the news isn’t so bad.

The overwhelming majority of the growth in mortgage size has come from those who are likely selling their home and buying a new one:

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But even here, the average first-time buyer’s mortgage in NSW is up 16% ($82,362) since November 2019. That means paying $173 more per month on average than a first-time buyer who took out a loan two years ago.

And remember it’s $173 additional. The average monthly repayments in New South Wales on a first-time home buyer’s loan paying the reduced mortgage rate of 3.45% are $2,557, or almost $31,000 a year.

So yes, low interest rates make affordability better than it would have with higher rates. But these low rates and tax measures in turn raise prices and therefore affect the size of mortgages.

For new homebuyers, it seems they are still affected anyway.

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