WHAT DO HOT AIR BALLOONS & REAL ESTATE MARKETS HAVE IN COMMON?

Friday 10 Aug 2018

Hot air balloons rise on the roaring flames from burners and will stay aloft as long as the heat is applied. That also applies to real estate market prices! As long as the heat is applied they stay aloft, and over recent years we’ve had lots of heat with record low interest rates and growing demand for Australian property that has outstripped supply and seen markets rising rapidly.

But the heat has been turned off recently in many parts of the Australian real estate market and the air in the balloon is beginning to cool! In areas like Sydney and Melbourne, the balloon has already been dropping for 10 months, while in other areas the balloon is still remaining aloft but, without more heat it will soon start to drop.

That’s what is occurring now in some areas of the North Coast, as buyer numbers drop and days on market start to blow out. The balloon is starting to fall. It’s happening in Byron Bay now. Here in Yamba, our balloon is still aloft but lately, it feels like the gas might be running out.

Combine this change in market sentiment with the upcoming resetting of around 30 per cent of all mortgage debt between now and 2021 as per the below report, and a reckoning is coming for many property owners.

GOT AN INTEREST ONLY LOAN?

For many Australians wanting to get into the investment property market, interest only loans have provided a convenient and affordable way to leverage the equity in their principal place of residence. This type of loan has been the choice of many investors over the past decade, with around 40% of all mortgages being interest only at their peak. While this type of loan has been particularly popular with investors, it’s estimated that owner-occupiers still account for around 20% of interest only loans.

Whatever the reason for choosing an interest only mortgage product, with around 30 per cent of all mortgage debt subject to an interest only reset between now and 2021, a reckoning is coming for many

property owners. Selling now before a potential increase in distressed sales may be the best course of action for some.

The period of lower payments in the first few years of an interest only (IO) loan can be deceptive, if homeowners don’t effectively prepare for the increased payments, once the IO period of their loan ends.

Many such borrowers rely entirely on the market always rising. However, many ‘lose track’ of time and find the interest only reset on their doorstep before they know it. Some can struggle to switch to the higher

payments once the requirement to pay principal kicks in – an issue that is even more concerning considering a large number of mortgages will reset from interest only to principal over the next 4 years.

The RBA estimates around $120 billion in loans will reach reset and the majority of those homeowners will experience up to a 40% increase on their mortgage repayments. As interest only loans reach their term over the next four years, it’s expected that interest rates will rise, putting further financial pressure on mortgagees.

If mortgage repayments become unmanageable, the obvious choice for many will be to sell and cut their losses, however that’s when there are likely to be plenty of others in the same boat. If the majority of IO investors follow this course of action and rush to sell, the market will be flooded with stock, forcing property prices down.

If you are at all concerned, you should immediately seek professional financial advice. Start by asking us for an up-to-date appraisal of your property’s value and then see a professional financial advisor. Now may be the best time to sell.