Navigating Sydney’s Mortgage Market For Maximum Financial Gain – When Sydney farmers Kate and Andrew Dewez bought their first property in September last year, they expected prices to rise over the next few years so they could build a retirement portfolio.

The couple have bought a two-bedroom house in Balgowlah on the north coast, which they plan to rent for two years before moving into it.

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“We think it’s a good thing to have because it’s in a desirable location, and we bought it at a good price because the quality has gone down as there were fewer buyers out there,” Kate said.

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“We hope that the value will increase by five per cent every year in the next few years, so that we can consolidate our assets and then look at buying another place. That’s our step into the prospect of owning other properties.

“We are not too worried about further interest rate hikes because we made our numbers based on expected hikes before we bought the property, but hopefully, the market will start to stabilize soon, so prices will go up again.”

The couple, along with many other Australians, are watching closely what happens next to house prices following the housing boom in the pandemic.

“Residential property makes up the bulk of household wealth in Australia and has become a key part of retirement,” says Eliza Owen, CoreLogic’s head of research.

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CoreLogic estimates that 57 percent of household wealth is tied up in housing, which is now worth $9.3 trillion.

This makes the residential sector three times larger than the $3.3 trillion industry and triples the size of the $2.8 trillion listed market. Real estate also includes about 62 percent of the papers that are authorized to take deposits.

The sharp decline in house prices since the Reserve Bank began raising interest rates last May has shaken confidence, says Owen. “The mortgage-to-income ratio has risen to 146 percent, which has increased the risks associated with falling house prices, especially as household incomes have increased,” he says.

Since peaking last May, home prices across the country fell a record-breaking 8.4 percent earlier this month, driven by the tightest monetary policy in more than 30 years.

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Things could get worse from here if the Reserve Bank of Australia further raises interest rates to 4 percent says Louis Christopher, SQM Research managing director. “If we go to 4 percent, I believe that we would see more forced sales activities in the second half of 2023 and that will lower prices,” he says.

Many economists are expecting the Reserve Bank of Australia to raise interest rates one quarter to 3.35 percent in February and by one percent in March or April, to 3.6 percent. On May 1 last year, the benchmark rate was 0.25 percent.

Shane Oliver, chief economist at AMP Capital, says this could cause another 9 per cent price drop by September.

“The main risks on the downside are that the RBA raises the interest rate to 4 per cent as the financial market is speculating, and the economy goes into recession,” says Oliver.

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“The RBA has already raised rates by more than 2.5 per cent rate serviceability buffer which is valid until October 2021. In this situation home prices could fall by 30 per cent from their peak.”

It’s a tough time to be a consumer. Eight consecutive interest rate hikes have reduced the likelihood of borrowing by 27 per cent, while the rising cost of living has made it difficult to afford a mortgage, let alone save a deposit to buy a home. Retailers are also struggling, with fewer buyers looking to commit to big-ticket spending like buying a home.

Undoubtedly, the housing market faces a difficult year. But experts rule out a rate hike if the RBA were to end its tightening after February or March and start cutting rates until the end of the year.

“There’s a good chance we’re getting to the top of the benchmark interest rate and the RBA could either hold off on interest rate hikes after February or they could hike for a while before they do,” Oliver says. “They may start lowering prices at the end of the year.”

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SQM’s Christopher predicts that a pause in interest rates, as they have been for the rest of the year, would be enough to raise house prices by 9 per cent in Sydney and 7 per cent nationally.

This takes interest rates peaking at 4 percent, inflation reaching 8 percent but falling back to 5 percent, and the unemployment rate rising but remaining below 5 percent.

“If the RBA were to hold [rates] below 4 percent, looking at the economic expansion that has increased wages, I believe that it will create reasons for the recovery of the housing market, even if it is soft where we would see another number. The rise in house prices occurs in 2023, or at least, a situation where the market of the house would stop falling.”

But the recovery could be slow after house prices fell again in December. On average, it took 9 ½ months for home values ​​to move through the highest decline, before values ​​began to recover.

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“At least on a national level, no downturn has lasted longer than 11 months, but this varies by region, for example, Perth’s home values ​​were in a steady decline for more than five years immediately after mining,” CoreLogic’s Owen says.

“This recession is only eight months away, but it doesn’t look like it’s bottomed out yet. House value declines ‘increased’ in December, and this could continue into early 2023, as interest rates look set to rise slightly on the back of ongoing inflation.

During the housing market downturn caused by the GFC in 2008-2009, prices took 11 months to bottom and nine months to recover. The 2010-2013 recession took 20 months to hit, and 20 months to recover.

“It’s possible that if prices go down and the money goes up in the middle of this year, we could see a peak period of 15 months and take a long time to recover, but it’s not a hard rule. ,” Owen says.

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So, a lot is riding on the direction of interest rates and the health of the Australian economy.

“It’s uncertain what the next cycle will look like, although we expect it to be a much stronger lift than we saw through the 2010s and early 2020s,” Owen says.

“Last time Australia’s income was over 3 per cent, the country’s domestic economy rose to 16 per cent in 2009-10, but other factors such as strong overseas migration contributed to this, as did the housing market from a grassroots level, and being affordable.”

That means the days when buyers can count on house prices doubling every eight to 10 years may be over, says Owen.

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“I think this is likely to be less in the 2020s than the 2010s because the 2020s is a decade that is bringing back inflation,” he says.

“If we get a continuation of the spike in inflation, we could well reverse the trend of interest rates moving low for a long period of time which has led to previous inflation,” Owen says.

“This does not mean that real estate prices will not increase in 10 years, as real estate prices rise gradually over time in line with inflation, but high-growth areas may be difficult to uncover, or require a lot of research to find. “

The scenario is likely to see prices return to an average annual growth rate of 4.8 per cent over the past 10 years and 5.1 per cent annually over the past 30 years.

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The government’s move to increase affordable housing may also reduce inflation in the coming years, says independent economist Stephen Koukoulas.

However, he adds that there are other factors that can make people grow, such as overpopulation and lack of housing.

“This is a number of price increases over the next few years, as the pipeline of new development permits is running 11.3 percent below the 10-year average, which could lead to shortages in some housing markets,” says Owen.

“In nominal terms, housing may eventually return to record highs as the market moves in line with inflation.”

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Kent Lardner, the founder of Suburbtrends, says that a 10% increase in prices may occur in selected areas in 2023, but most markets cannot enjoy double digit gains until the end of 2024.

“Prices have been erratic over the past 12 months, with an average high of 17 percent based on the markets I’ve reviewed,” he says. “If interest rates start to come down again, hopefully in 2024, we will see some strong results as a result of the lack of new construction and population.

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