By Graeme Salt
Scarred by 22 per cent interest rates, many clients recount their fear of how hard it was to make loan repayments in the 80’s
Punitive interest rates can destroy property markets and livelihoods, but thankfully that’s unlikely to occur in Australia today.
And, sky-high interest rates have occurred throughout the world at various times. I remember when UK interest rates rose from 10 to 15 per cent all in one day in 1990 on what became known as Black Friday. The property market was destroyed such that we got used to the phrase negative equity – when a home was worth less than the mortgage on it.
People with negative equity live a miserable existence, but research from the Reserve Bank of Australia shows we are a long way from negative equity.
When borrowers are straddled with a mortgage bigger than their home’s value, they can’t sell up because they will still owe the bank money. They must keep paying sky-high interest rates and eking out a frugal lifestyle due to high interest rates.
Thankfully, research from the Reserve Bank shows that the share of loans in negative equity remains negligible and much lower than prior to the pandemic. And that If housing prices fell a further 10 per cent from January 2023 levels, the share of loan in negative equity is estimated to rise to just 2 per cent.
Given that over the past four months Sydney house prices have increased by more than 3 per cent, Melbourne lifted by 0.3 per cent, Perth by 1 per cent and Brisbane by 0.1 per cent, price drops and negative equity are looking less and less likely.
In fact, despite rate rises, many are behaving with a sense of optimism about the property market.
However, we are not out of the woods yet. Most economists predict at least one more interest rate rise.
And, with unemployment rising, the next six months may see caution coming into the market.
But the fundamentals are strong; Australia’s population continues to grow and there is evidence of overseas buyers looking to invest here again.
If you want to discuss your home lending needs, please feel free to contact me on 02 9922 5055