Welcome to this week’s edition of Property Edge, your go-to source for the latest insights and trends in the real estate market. As property entrepreneurs, staying informed about the current market conditions is crucial for making strategic decisions. This week, we delve into the key factors shaping Australia’s real estate landscape, examine the trends in foreign investment, discuss the latest on mortgage arrears, and highlight early warning signs of financial stress in the housing market. Let’s dive into the details to better understand how these developments might impact your property investments.

Key Trends Shaping Australia’s Real Estate Landscape in 2024

Shifting confidence levels, taxes, and interest rates are currently shaping Australia’s dynamic real estate landscape. Home buyers and sellers are navigating these unpredictable times with varying degrees of success.

Property Tax Challenges

Property-related taxes are significantly impacting markets, especially in Victoria, where impending land tax increases are prompting landlords to sell rental properties. Gary Johns from Hodges Real Estate in Melbourne notes that the combination of increased lending costs, higher living costs, and expanded land taxes has been too much for many investors. “One in four sales last year were land tax-related,” he remarked, emphasising the resulting pressure on rental prices.

Premium Properties in Demand

Despite the challenging market, A-grade properties in prime locations are performing exceptionally well. Andrew Liddell from BresicWhitney in Sydney highlights that vendors of such properties can feel confident. However, B- and C-grade properties are more sensitive to pricing, which has become a critical factor. Similarly, Aaron Zhao from Fletchers in Melbourne reports that well-located luxury properties are attracting significant buyer interest, provided they are market-ready

Shifting Buyer Confidence

Home buyers are cautiously re-entering the market, taking their time to make decisions. Michael Bacon from Place Estate Agents in Brisbane observes that buyers are not rushing as they used to, while David Mills from McGrath notes that interest rate speculation has made buyers more price-sensitive and property-dependent. This cautious approach reflects a more value-driven mindset among buyers.

Impact of Interest Rates

Interest rates have been a dominant force in the real estate market since they began rising in May 2022. Real estate agents at the Australasian Real Estate Conference (AREC) cited interest rates as a major factor influencing market behaviour. Speculation about rate hikes has led to fewer bidders at auctions and a more conservative approach from buyers, even when lenders are willing to provide financing.

Foreign Interest in Australian Property Declines

According to the latest quarterly NAB property survey, the share of foreign buyers in new Australian housing markets has decreased from 11% in Q4 to 10% in Q1. Despite this drop, the current figure remains above the long-term survey average of 9.1%. This is a significant increase compared to mid-2021 during the pandemic when the share was barely over 2%.

Housing Markets Over Time

The reduction in market share in Q1 is attributed to declines in New South Wales (NSW) from 15% to 12% and in Western Australia (WA) from 14.2% to 11%. Conversely, Queensland (QLD) saw an increase from 6.3% to 7.6%, while Victoria (VIC) remained stable at 10%.

The market share of international buyers remains above average in all assessed states, highlighting their ongoing interest despite recent fluctuations.

In the established housing markets, the share of foreign buyers dropped slightly to 3.8% in Q1 from 4.0% in Q4, remaining below the long-term average of 4.7%. NSW saw an increase to 4.5% from 4.2%, while other states experienced declines: QLD to 4.0%, VIC to 3.8%, and WA to 2.2%.

The modest rebound in foreign interest, despite high levels of immigration, suggests a cautious approach from international buyers. Recent reports indicate that Chinese buyers, in particular, have shifted from buying to selling Australian property, contributing to the overall trend.

This data underscores the complex dynamics at play in the Australian property market, influenced by both local policies and international economic conditions.

Rise in Mortgage Arrears Managed by Economic Factors

Despite a recent increase in mortgage arrears, several factors have helped keep overall arrears relatively low. According to S&P, refinancing opportunities, financial buffers, and low unemployment have played significant roles in maintaining minimal arrears levels.

Borrowers have been frugal with their spending to minimise loan servicing costs. While interest rates remain high, households are prioritizing debt obligations over discretionary spending, which helps keep arrears low.

A recent increase in gross discretionary income has helped offset rising mortgage servicing costs. Upcoming tax reductions are also expected to ease future debt serviceability constraints. These factors have contributed to a slight strengthening of the household savings ratio, which increased from 1.9% in Q3 to 3.2% in Q4. Despite this increase, family savings remain significantly lower than the 24% seen during the pandemic.

According to the Reserve Bank of Australia, the proportion of housing loans with an offset account is rising. Borrowers who are able to are turning to these products to reduce their debt serviceability obligations.

S&P predicts that while unemployment is expected to rise, it will still be below pre-pandemic levels. Higher property values also provide current homeowners with more flexibility to manage their finances and reduce debt.

Although increased unemployment will inevitably lead to higher arrears, the overall impact is anticipated to be moderate as long as the unemployment rate remains relatively low.

Surging Mortgage Hardship Claims and Quick Home Resales Signal Financial Stress

Behind the smiles and “sold” stickers, a growing segment of home sales reveals underlying financial stress. According to CoreLogic, a record 16% of property sales early this year were homes last traded within the past three years.

While this can indicate a hot property market with investors flipping houses, the current proportion of quick resales suggests another factor at play—mortgage hardship. CoreLogic’s Eliza Owen notes a combination of mortgage stress and capital gain windfalls contributing to the rise in short-term resales.

Recent figures from ASIC highlight a surge in mortgage hardship notices, with a 54% increase in the final three months of 2023 compared to the same period in 2022. Last year, 30 of Australia’s largest lenders recorded over 444,000 hardship notices connected to nearly 300,000 accounts, with 40% related to mortgages.

Close to 3.5 million Australian households have mortgages, meaning approximately 2.7% of home loan borrowers have informed their banks they can’t meet their current terms. This figure is much higher than the 0.7% of home loans in 90-day arrears, which is when banks typically begin foreclosure procedures.

Despite the low rate of mortgage arrears, the Reserve Bank of Australia (RBA) acknowledges an increasing number of borrowers requesting temporary hardship arrangements, keeping arrears lower than they might otherwise be.

ASIC’s report indicates that over commitment is the most common cause of mortgage hardship applications. This term encompasses various issues like reduced income, unemployment, medical problems, and more, suggesting that many borrowers were lent too much without sufficient interest rate buffers.

A rule change by banking regulator APRA in 2019, which lowered the interest rate floor on mortgage serviceability tests, may have contributed significantly to current mortgage stress. As interest rates fell, repayment buffers also decreased, leading to increased borrowing.

Despite rising hardship notices, “distressed” sales remain low. Most hardship notices relate to loans more than five years old, but a notable group of borrowers are struggling less than three years into their mortgage. CoreLogic data suggests these borrowers are selling voluntarily before their lenders force a sale.

While property prices are generally rising, which helps avoid foreclosures, about 40% of hardship cases fall straight into arrears once their assistance package ends. This could lead to an increase in distressed listings and financial distress later this year, especially if property prices start to decline.

The situation highlights the delicate balance in the Australian property market, where rising hardship claims and quick resales are early warnings of financial stress amid economic uncertainties.

Thank you for joining us for this week’s Property Edge newsletter. The real estate market is constantly evolving, and staying ahead of the curve is essential for success. We hope the insights shared today provide valuable information to help you navigate the current market dynamics. If you have any questions or need further assistance, feel free to reach out. Stay tuned for our next edition, where we will continue to bring you the latest updates and expert analysis in the world of property. Until next time, happy investing!

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