Australian home owners struggle to stay afloat as interest rates sting

Australian property prices have stopped falling, even though interest rates continue to soar at their fastest rate in history. PHOTO: BLOOMBERG

SYDNEY – Four years ago, Singaporean Julian Choo, who moved to Australia in 2010, and his Australian-Malaysian wife Joanne Chai finally bought their first home in Sydney, one of the most expensive property markets in the world.

The Covid-19 pandemic erupted shortly after their purchase and their property soared in value due to a plunge in interest rates, which reached a record low of 0.1 per cent.

The couple – buoyed by the central bank’s claim that rates would not rise until at least 2024 – then decided to buy another property. At the end of 2021, they bought an investment property near the site of Sydney’s planned second airport.

But the couple’s plans did not quite go as expected.

In May 2022, as inflation began to soar, the Reserve Bank of Australia (RBA) changed course and lifted interest rates. Since then, rates have risen at each of the bank board’s monthly meetings. Last week, the bank increased interest rates to 3.6 per cent – the highest since 2012.

For Mr Choo and Ms Chai, as well as countless other Australian mortgage holders, these rate rises have delivered a heavy financial blow. Mr Choo said their monthly mortgage repayments have increased since May 2022 by more than 60 per cent.

“We are in a mortgage prison,” he told The Straits Times. “Being gullible like the rest of Australia, we listened to the RBA about it not lifting rates until 2024... Lo and behold, the RBA started to lift rates and it hasn’t stopped since.”

Mr Choo, a mortgage broker and an executive committee member of the Australian Malaysian Singaporean Association, said their mortgage payments amount to more than half of their total incomes.

To boost their cashflow, Mr Choo and Ms Chai, a project manager for infrastructure projects, have rented out a room in their home on Airbnb. They are also looking at building a granny flat – a small self-contained living area – on their investment property to provide additional rental income.

“We borrowed up to our necks when we picked up the second property,” he said. “Like the rest of Australia, we are hoping the rate rises are coming to an end and look forward to potentially some rate cuts in the future.”

In Sydney, property prices have dropped 13.4 per cent in the past year, though they are still about 11 per cent higher than at the start of the pandemic.

Prices have stabilised in recent weeks – and are actually up 0.2 per cent this month – but this is mainly due to low numbers of properties for sale because owners are afraid to sell in a falling market.

The RBA is expected to lift rates to about 4.1 per cent, and most analysts believe home prices nationally will still fall about 10 per cent. National property prices were down about 9 per cent in the past year.

The chief economist at financial services firm AMP, Dr Shane Oliver, said he expected national prices to fall a further 8 per cent due to the series of interest rate hikes.

Mr Julian Choo and his wife Joanne Chai bought their first home four years ago in Sydney, one of the most expensive property markets in the world. PHOTO: JULIAN CHOO

“The downward pressure on property prices will continue for some time yet even if the RBA soon pauses the cash rate,” he said in a briefing note last week.

For many indebted Australian property owners, the challenges are about to become much worse.

In the coming months, hundreds of thousands who took out fixed interest rate loans at low rates will face a sharp rise in repayments as they switch to a variable rate loan. Those with the average mortgage of A$600,000 (S$532,500) will face an instant monthly increase in repayments of A$1,400. An estimated 3 per cent of property holders may then be forced to sell their home.

Mr Choo said the increase in monthly mortgage repayments was a concern, but he was confident that ultimately the properties would prove to be smart investments.

“We have confidence in the Australian property market... A large majority of property owners are home owners who are here for the long term, and we have a stable and sound banking system,” he said.

“With a limited capacity to accumulate savings, you feel the pinch,” he said but added: “We are confident we can keep things afloat.”

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