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Will The Mortgage Cliff Impact Perth’s Property Market?

With over 800,000 Australian borrowers coming to the end of their fixed-rate home loans over 2023 and 2024, how will it impact the property market here in Perth?

A nation of fixed-rate mortgage holders

At the height of the COVID-19 pandemic in 2020 and 2021, lenders began offering fixed-rate home loans with interest rates below 2%. As a result, almost half of Australian borrowers opted to lock in their interest rates.

Now, three years later, most of those fixed-rate loans are expiring, and many borrowers face far higher interest rates (and mortgage repayments).

So what impact is that having on the Perth property market, and how will it play out over the coming 12 months?

Why so many borrowers fixed their interest rates

With the COVID-19 pandemic causing cities, states and countries into lockdown over 2020 and 2021, there was a genuine fear of a severe recession. To mitigate this, the Commonwealth government rolled out initiatives, including JobKeeper and tax breaks. Alongside this, COVID Emergency Measures helped landlords and tenants.

At the same time, the Reserve Bank of Australia (RBA) slashed the official cash rate to an emergency level of just 0.1% to help stimulate economic activity. The RBA also introduced a special three-year funding scheme for lenders at exceptionally low rates.

The lenders then passed this on to borrowers through fixed-rate home loans, with rates dipping to 1.95% in early 2021. These home loans typically had two- to three-year “fixed” terms, which means most are scheduled to conclude over 2023 and 2024.

Since then, however, the RBA has been steadily increasing interest rates. The last rate rise, in November 2023, pushed the official cash rate as high as 4.35% – a level it hasn’t been at in 12 years.

This shift means borrowers transitioning off their fixed-rate loans face a markedly different interest rate landscape from when they last negotiated their home loans.

In fact, the average standard variable interest rate stands at 6.72% – and the average Big Four bank standard variable rate is as high as 7.37% right now.

How does this affect borrowers?

Exactly how this impacts borrowers depends on the size of their home loan and the deal they receive, as the tables below show.

Principal and interest home loan*

Mortgage size Monthly repayments when interest rates 2.0%* Monthly repayments when interest rates 6.72%* Difference
$200,000 $739 $1,293 $554
$400,000 $1,478 $2,586 $1,108
$600,000 $2,218 $3,880 $1,662
$800,000 $2,957 $5,173 $2,216
$1,000,000 $3,696 $6,466 $2,770

* Assumes a 30-year principal and interest home loan with monthly repayments and no extra charges.

Interest-only home loan*

That said, many investors take out interest-only home loans, hoping to receive a tax break on their interest repayments while generating the potential for a capital gain.

If an interest-only home loan were to rise by the same amounts, there would be a greater difference still, as the table below shows.

Mortgage Size Monthly Repayments (2.0%) Monthly Repayments (6.72%) Difference
$200,000 $333 $1,120 $787
$400,000 $667 $2,240 $1,573
$600,000 $1,000 $3,360 $2,360
$800,000 $1,333 $4,480 $3,147
$1,000,000 $1,667 $6,890 $5,223

* Assumes a home loan with five-year interest-free term and 30-year term monthly repayments and no extra charges.

Has there been any impact on the Peth property market so far?

So far, the so-called mortgage cliff seems to have had little impact on the Perth property market.

The most recent CoreLogic data shows that Perth’s property market has performed better than anywhere in Australia over the past 12 months, rising an average of 10.8%, including 4.6% over the last quarter.

Our view is that our city’s strong performance, in the face of much higher interest rates, comes down to a few main factors, most notably:

  • A growing population. Perth’s population is growing rapidly, and our state boasts the highest growth rate of any jurisdiction in Australia.
  • A strong economy. The reasons so many people are moving here are obvious: lifestyle and jobs. Our low unemployment rate and high incomes mean people have more to spend.
  • Affordable housing. Though we may complain about rising house prices, Perth is comparatively cheap compared to other major Australian cities. The median house price here ($631,195) is almost half that of Sydney ($1,121,196).
  • Capacity to absorb rate rises. Because incomes are high and property prices are relatively low, many Perth residents can absorb any rate rises without too much financial pain.
  • High cost of renting. Rents in Perth are at record highs, meaning that in the rent vs buy equation, buying property remains attractive. However, it also means that investors are receiving record rents to help cover any increased mortgage costs.

Is this likely to change going forward?

While it’s true that more and more mortgages will come off their fixed rates over the coming 12 months, the evidence suggests most Perth mortgage holders and buyers will be able to still afford to pay their home loans.

That means there should be no wide scale defaulting and sell-off of distressed loans – something that would have a serious impact on property prices.

We also believe most would-be buyers will still have the capacity to meet any loans they take out – and, given the high cost of renting, more and more first-home buyers will begin to enter the property market for the first time.

These factors will help ensure the Perth property market remains robust. Instead, we’re likely to continue to have the reverse problem – a shortage of homes for sale, rather than too many.

We’re also optimistic that we’re at or at least near the peak of the rate rise cycle and that we may see the RBA hold off on further rate rises and could even start bringing them down over 2024.

If that happens, it could encourage more people to buy, pushing prices higher still.

Want more?

If you want to invest in Perth real estate, rent out your Perth property or find your next Perth rental home, we can help. Get in touch with our specialist Perth property team today.

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