Banking litigator Roger Brown warns of Australian house price bubble as interest rates rise
A banking expert who leads lawsuits against Australian banks is warning of a major property market crash as interest rates rise.
Roger Brown, a former Lloyds of London insurance broker , is forecasting the ‘biggest bubble in Australian history’ as Reserve Bank interest rates rise from a record-low of 0.1 per cent.
A possible rate rise on Tuesday would be the first since November 2010, which means it will hit more than 1.5million borrowers would have never experienced a variable rate increase.
In February, 9,994 first-home buyers took out a mortgage for the first time and were among 152,346 who became new homeowners during the past year, Australian Bureau of Statistics data showed.
Many borrowers paying off a house with a seven-figure price tag could see their monthly mortgage repayments rise by more than $800 with a year as interest rates keep going up to curb soaring inflation.
Mr Brown, who has previously instigated class actions against Australian banks, said a series of interest rate rises could cause property prices to crash as borrowers struggled to keep pace with higher repayments.
‘The biggest housing bubble in Australian history has been upon us for three years now, and consequently, the biggest financial bust in history is upon us,’ he tweeted.
‘Probably 1.50 million mortgage borrowers will go under.’
A retired London insurance broker who leads lawsuits against Australian banks is warning of a major property market crash as interest rates rise (pictured are bidders at a Melbourne auction)
At the start of the pandemic, Australia’s average weekly household income stood at $2,349 or $121,108 a year.
That meant a couple with that combined income, as measured by the ABS, was able to buy a $908,000 house with a 20 per cent deposit.
With a mortgage of $726,648, they would have a debt-to-income ratio of ‘six’ – the level the Australian Prudential Regulation Authority deems to be risky.
But huge price increases have seen Sydney’s median house price surge to $1.417million, CoreLogic data for April showed.
In Melbourne, the median house price is $1.002million.
That means many couples getting into the property market for the first time would have taken on mortgages above the riskier debt-to-income ratio of ‘six’.
The Covid downturns saw property prices drop in early 2020 as national lockdowns sparked the first recession since 1991.
Later that year in November, the Reserve Bank of Australia cut the cash rate to a record-low of 0.1 per cent, causing national house prices to last year surge at the fastest annual pace since 1989.
Inflation in the year to March soared by 5.1 per cent – the fastest pace since mid-2001 following the introduction of the GST.
Roger Brown is forecasting the ‘biggest bubble in Australian history’ as Reserve Bank interest rates rise from a record-low of 0.1 per cent
Three of the Big Four banks – ANZ, Westpac and NAB – are now predicting a May rate rise of 0.15 percentage points, that could take the cash rate to 0.25 per cent.
They are expecting the cash rate to hit two per cent by 2023 for the first time since May 2016.
Surging house prices mean many borrowers who bought a home in the outer suburbs with a seven-figure price tag could be paying an $800 a month more on their mortgage within a year as rates keep rising.
A home owner in Sydney, Melbourne or Canberra paying off a house worth a million dollars would most likely have an $800,000 mortgage, with a 20 per cent deposit factored in.
A small rate rise on Tuesday would see their monthly mortgage repayments rise by $62 to $3,137.
But within a year, monthly repayments could rise by $833 to $3,908 as variable mortgage rates climbed from 2.29 per cent to 4.19 per cent.
Westpac on Friday updated its forecasts to have Sydney property prices diving by 14 per cent between now and 2024 as Melbourne values dropped by 15 per cent.
Senior economists Bill Evans and Matthew Hassan warned rate rises risked causing financial stress.
‘As the economy slows and external price pressures ease, the combination of higher interest rates and weakening growth may also see more risks emerge if significant pockets of financial stress start to emerge in the household and business sectors,’ they said.
Sydney and Melbourne’s property markets have suffered the first quarterly contraction since the national Covid lockdowns of mid to late 2020.
A possible rate rise on Tuesday would be the first since November 2010, which means it will hit more than 1.5million borrowers would have never experienced a variable rate increase (pictured is a Melbourne auction)
Melbourne is Australia’s worst-performing property market, with median house prices falling by 0.2 per cent last month and by 0.5 per cent in the three months to April to $1,000,026, CoreLogic data showed.
But on an annual basis, the mid-point price has risen by 10.1 per cent.
Sydney’s median house price fell by 0.1 per cent in April and by 0.3 per cent over the quarter to $1,416,960.
The annual growth pace has moderated to 17.1 per cent from 30.4 per cent as recently as December.
Mr Hassan said a broader property market correction, beyond Sydney and Melbourne, was likely to occur from mid-2022 as rates started rising.
‘The market passed a turning point at the start of the year with turnover now moving lower quickly and price growth tapering off in most markets,’ he said.
‘This shift is expected to accelerate in coming months as the RBA delivers a series of interest rate rises with a broad correction phase expected to begin mid year.’
Ratings agency Fitch Ratings last week said climbing property prices were an issue as Australians took on more debt and entered mortgage stress territory.
‘House price growth accelerated through 2021, which could pose risks in the medium term if fuelled by credit growth that results in a significant rise in household leverage,’ it said.
Australia’s household debt to disposable income ratio, after tax, at the end of 2021 stood at 186 per cent, which was higher than the 180 per cent level of late 2020.