Financial guru Scott Pape has warned Australia’s housing bubble is set to burst, and Australians ‘wouldn’t want to be up to their eyeballs’ in mortgage debt when it does.
Pape, better known as The Barefoot Investor, noted in his blog interest rates which are at record lows ‘will rise and when they do, they’ll burst the housing market bubble’.
Australian house and apartment prices have risen dramatically, with a 22.2 per cent increase in the year to November marking the fastest annual surge since 1989.
Property values are growing at ten times the rate of wages growth.
Housing prices have surged up 22.2 per cent in Australia in the year to November with tough competition for buyers to secure a house (stock image)
CoreLogic data showed the national value of homes had increased for 14 consecutive months, with the median price increasing by $126,000 in the past year.
Australia’s mid-range property price of $698,170 is now so dear an average, full-time worker earning $90,329 would be in mortgage stress, even with a 20 per cent mortgage deposit.
That’s because the Australian Prudential Regulation Authority, the banking regulator, considers a debt-to-income ratio of six of more to be dangerous.
In Sydney, house prices have surged by an even more dramatic 30.4 per cent in the year to November, taking the mid-point to a very unaffordable $1,360,543.
In his blog, Pape answered a question from a reader who asked why they were finding it so hard to buy a house.
‘My fiancé and I both earn good money. We have a healthy deposit and budget and want to buy so we can start a family,’ the reader said.
‘We’ve offered more than they were asking and been told no, the vendor took a cash offer instead.
Barefoot Investor Scott Pape (pictured) said the housing bubble would burst and Australian should be wary of borrowing too much on their mortgage
‘I obsess over realestate.com, ringing as soon as something comes up, only to find it was sold while waiting to be uploaded to the site.’
Property prices keep surging
SYDNEY: Up 30.4 per cent to $1,360,543 (houses)
Up 15.3 per cent to $837,169 (units)
CANBERRA: Up 27.2 per cent to $999,755 (houses)
Up 14.7 per cent to $568,308 (units)
HOBART: Up 32.1 per cent to $558,455 (units)
Up 26.6 per cent to $726,779 (houses)
BRISBANE: Up 27.9 per cent to $757,194 (houses)
Up 11.4 per cent to $443,981 (units)
ADELAIDE: Up 23.9 per cent to $608,624 (houses)
Up 6.8 per cent to $380,058 (units)
MELBOURNE: Up 19.5 per cent to $986,992 (houses)
Up 9 per cent to $626,449 (units)
DARWIN: Up 20.1 per cent to $368,635 (units)
Up 14.8 per cent to $562,900 (houses)
PERTH: Up 14.8 per cent to $552,158 (houses)
Up 12.4 per cent to $400,831
Source: CoreLogic data for the year to November 2021
They added they had called real estate agents for help and told them they were pre-approved first-home buyers, only to be ignored.
‘The dream of owning your own home must be feeling like a heart-crushing unlikelihood.’
Pape told the reader not to give up, adding he believed the housing market bubble would eventually burst.
‘I have no crystal ball, and picking short-term economic moves is a mug’s game,’ Pape said.
‘Yet it gets clearer when you zoom out.’
He pointed out Reserve Bank of Australia interest rates in 1990 stood at 17.5 per cent, and they were now at a record-low 0.1 per cent.
The RBA slashed the cash rate in late 2020 to offset the financial effects of border closures and lockdowns.
It also gave $188billion to the banks, via its Term Funding Facility, to provide cheap home and business loans.
Low rates have spurred demand, and pushed up prices.
Both the Commonwealth Bank and Westpac are expecting property price growth to slow in 2022 and fall in 2023 as the RBA raised rates early.
Over-leveraged borrowers would also struggled as standard variable rates increased.
Pape said he had asked his eight-year-old son where interest rates would go and he replied: ‘Up, they can’t get that much lower’.
‘So when interest rates rise, and they surely will, it’ll be brutal for many people who’ve borrowed too much,’ Pape said.
‘I can’t tell you when that will be … the only thing I can say with great certainty is that you don’t want to be up to your eyeballs in debt when they do.’
The property markets in Sydney and Melbourne are slowing, although still in positive growth, while the Brisbane and Adelaide markets are going strong (stock image)
CoreLogic’s research director Tim Lawless said it was already evident that the pace of growth was slowing.
‘Virtually every factor that has driven housing values higher has lost some potency over recent months,’ he said.
‘Fixed mortgage rates are rising, higher listings are taking some urgency away from buyers, affordability has become a more substantial barrier to entry and credit is less available.’
Record-low interest rates and the ability of more people to work from home has seen a surge in demand for houses, causing prices to rise in both capital cities and regional areas.
Across the capital cities, Melbourne’s growth is slower than Brisbane and Adelaide which are still going strong.
Hobart, Sydney and Brisbane had the biggest value increases in the last 12 months of 27.7 per cent, 25.8 per cent and 25.1 per cent respectively.
While Perth at 14.5 per cent and Melbourne at 16.3 per cent had the smallest growth.
Reserve Bank of Australia Governor Philip Lowe has hinted the cash rate, now at a record low of 0.1 per cent, could rise in 2023 instead of 2024 as earlier promised.
The major banks are forecasting a rate rise in 2022, with none of the big four lenders offering fixed mortgage rates of less than two per cent.
HOME VALUES IN AUSTRALIAN CITIES IN THE PAST 12 MONTHS
Sydney 25.8 per cent rise $1,090,276 median property value
Melbourne 16.3 per cent rise $788,484 median property value
Brisbane 25.1 per cent rise $662,199 median property value
Adelaide 21.4 per cent rise $558,179 median property value
Perth 14.5 per cent rise $528,540 median property value
Hobart 27.7 per cent rise $676,595 median property value
Darwin 16.7 per cent rise $493,047 median property value
Canberra 24.5 per cent rise $882,519 median property value
Combined capitals 21.3 per cent rise $783,557 median property value
Combined regional 25.2 per cent rise $527,322 median property value
National 22.2 per cent rise $698,170 median property value
Source: CoreLogic data for November 2021