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Australia’s residential property market to soften

Australia’s residential property market to soften

It never ceases to amaze me that when a sector that has enjoyed a roaring bull market starts to turn the ‘experts’ try to out-do one another in giving pessimistic forecasts.  And that is now happening with Australia’s residential property market, where the general consensus is that prices could soon drop by 15 to 25 per cent due to rising interest rates.

First, a few facts. There are around 10.5 million homes in Australia valued at an average $950,000 each for a total value of around $10 trillion.  Around one-third of the homes (3.5m) are owner occupied with a mortgage; around one-third are investment properties presumably receiving rental income; and around one-third are owner occupied without a mortgage.

The total value of the mortgage market is $2.1 trillion, or an average of $600,000 per mortgage on the 3.5 million owner occupied homes with a mortgage.  However, if we account for investor mortgages – which are around one-third of total mortgages or $700 billion – the average mortgage comes down to an estimated $475,000 and the average loan to value ratio (LVR) approximates 50 per cent ($475,000/ $950,000).

Since the beginning of 2021, three and four-year fixed home loans have jumped from sub 2 per cent to around 4.5 per cent; whilst the interest rate on variable home loans is around 2.4 per cent.  Hence, around 75 per cent of mortgages are “variable” and consequently are vulnerable to the current “late” tightening cycle implemented by the Reserve Bank of Australia. Further those exceptionally low three and four-year fixed mortgage deals will start rolling over from mid-2023, with a material increase in repayments flowing through to those borrowers.

If we assume the RBA cash rate increases by 1.0 per cent from the current 0.35 per cent to 1.35 per cent, then the average repayment on a $475,000 mortgage would increase by $4,750 per annum or $400 per month. On the total value of mortgages of $2.1 trillion, this would equate to $21 billion per annum of additional interest expense or around 1 per cent of Australia’s GDP (of $2 trillion).

To me, this seems manageable.

However, if persistently high inflationary expectations force the RBA to increase the cash rate by 2.0 per cent from the current 0.35 per cent to 2.35 per cent, then the average repayment on a $475,000 mortgage would increase by $9,500 per annum or $800 per month.  And on the total value of mortgages of $2.1 trillion this would equate to $42 billion per annum of additional interest expense or 2 per cent of Australia’s GDP (of $2 trillion), or 19 per cent of Australia’s retail spend on an ex-food basis (of $223 billion).  

This is far less manageable, and for those recent home buyers who have got away with a mortgage loan to value ratio of say 85 per cent (an average of $807,500/$950,000), the prospect of having negative equity (with a 15 per cent average decline on the value of their home) becomes a very real proposition. 

As investors, we need to keep a close eye on inflationary expectations in Australia, the degree the RBA pushes up the cash rate, and the extent this slows an economy exiting from COVID-19. In the meantime, it will be interesting to observe the experts out-do each other in terms of their pessimistic forecasts on the softening residential property market.


Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. Phil Crossan

    Hi David,

    What implication does softening property prices have for bank shares?

    Thanks for teaching us over many years through the blog.



    • Hi Phil, Bank shares should be relatively unaffected unless Australia (and New Zealand) enters a long and very deep recession – something we have not experience for three decades. In the early 1990’s The Banks, often through their finance company subsidiaries (AGC, Esanda etc.) had enormous exposure to commercial property development in the capital cities. Due to very high unemployment, leverage and much higher interest rates, the vacancy rate went up to around 25 per cent, and the valuation on many buildings/ developments halved. The Banks collectively had enormous bad and doubtful debts, and there was also discussion whether some were technically insolvent. The upshot was they had large capital raisings at what, in hindsight, was at giveaway prices.

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