What to expect in the property and lending market in the next 12 months?

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What to expect in the property and lending market in the next 12 months?

Written by: Maria Papa

Originally published 06 June 2020


New GDP figures have confirmed the economy has shrunk by 0.3% for the first three months of 2020. GDP is a measure of the total value of all the goods and services Australia produces. It’s a measure of how healthy the economy is and right now the economy is not doing well.

Australia is facing its first recession in 29 years. The bushfires we experienced earlier this year followed by the social distancing rules, travel bans and lockdown in March caused by the coronavirus pandemic hit the Australian economy badly.

The treasurer, Josh Frydenberg has conceded a recession is inevitable and the full impact of the Covid-19 shutdown will be felt in the second quarter of 2020. The technical definition of a recession is two consecutive quarters of negative growth or contraction. The official confirmation that Australia has suffered a recession will happen in September.

The contraction in GDP is a result of the collapse in consumer spending on services and falls in government capital expenditure and household construction.  As the government begins its task of getting the economy back on track, what can you expect to happen to the Australian property and lending market in the next 6 to 12 months.

A prolonged downturn in the housing market

Economists and property analysts are warning of house price falls because of rising unemployment and expectations of a deep recession in the coming months. In an effort to avoid a fall in housing construction, the Federal Government has introduced the home builder’s cash grant. The scheme will provide a $25,000 cash grant to eligible homeowners in the hope of preventing a downturn in the construction industry.

Interest rate is expected to remain low for some years

RBA’s governor Philip Lowe recently said that rates will not rise for some years given the uncertain outlook of the Australian economy. He emphasised that cash rates would likely remain at 0.25% for years until the unemployment rate comes down below 5%.

Further tightening of lending criteria by banks

Banks are making changes to their home loan lending policies as a result of a constantly changing environment during the pandemic. Expect more hurdles, more requirements and income verifications for home loan applications. Applicants are asked questions whether their employment will be affected by COVID-19 and commentary on their income position and any foreseeable changes that may affect their financial situation. For example: The customer is currently working full time however has been advised they will be stood down in a fortnight for 2 weeks at a time.

Additional proof and requirements are imposed on those working in the hospitality, aviation, retail, or tourism industry. They have to provide proof showing that their roles and incomes are not affected.

A few banks are verifying employment before settlement by requiring the applicant to provide a copy of their payslip. On top of the two years’ financial returns, self-employed applicants are required to submit up to date BAS statements and trading statements to make sure that their business is still operating. 

As COVID-10 continues to impact Australia, banks will continue to adjust its lending policies.

A rise in rental vacancies, a drop in rent

Closed borders, job losses and restrictions on short-term rental arrangements are all having a predictably negative impact across Australia’s rental markets.

A recent article from CoreLogic has identified the areas across Australia most affected by the onset and lingering presence of the COVID-19 pandemic, with inner-city suburbs predictably the hardest hit.

The inner suburbs of Melbourne and Sydney were identified as particularly at-risk due to pre-existing oversupply of rental properties mixed with a high ratio of renters, many of whom could be experiencing job loss or financial stress.

As the tourism downturn affects the Airbnb owners, expect more of these landlords letting out their properties for long term rental. As Australia closed its borders, International student arrivals have dropped. With less students, demand for rental property also decreases. Those who have lost their jobs can no longer afford their rent and may start moving back to live with their mum and dad.  As landlords struggle to get renters, this puts pressure on them meeting their loan repayment. This in turn puts pressure on landlords to sell their properties.

An opportunity for first home buyers

The market downturn in property prices present an opportunity for first home buyers to break into the market. For those with secure employment in industries not affected by the virus, this is a great time to explore purchasing their first home.

Another factor that provides first home buyers the confidence to get into the property market is the First Home Loan Deposit Scheme.

The FHLDS is an initiative by the Australian Government to support eligible first home buyers to purchase a home sooner. The scheme provides a guarantee that will allow first home buyers on low and middle incomes to purchase a home with a deposit of as little as 5%.

Right now, the 10,000 places for the 2019-2020 financial year have now been reserved. Another 10,000 scheme places will be available for the next financial year from 01 July 2020. It is a good time to start chatting with a mortgage broker today to find out if you can qualify for this government scheme.

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