The unreachable Australian dream

Who thought house prices were going to fall due to the economic fallout from the COVID-19 pandemic? Our hand is up!

Unfortunately for us, and for those wanting to enter the housing market for the first time, we were wrong. Below, we look at the continued increase in property values and why the “Australian Dream” may be unreachable.

The unreachable Australian dream

As the economic effects of the coronavirus pandemic took hold in early 2020, there were widespread predictions of substantial falls in housing prices. At one extreme CBA estimated that, in its worst-case scenario, home prices could fall 32%. Even a more modest scenario pointed to housing prices falling by 11% over three years.

Such predictions are enough to strike fear into the hearts of existing homeowners, particularly those with mortgages. But for those still waiting to experience the great Australian dream, a drop in property values would provide a foot in the door of home ownership. It would also help people seeking to move up the real estate ladder.

Why the expected decline?

The predictions of a hit to housing prices made perfect sense. Coronavirus threw many thousands of people out of work and many others experienced a drop in income. Normally this would lead to an increase in loan defaults and forced sales, creating a lift in housing supply just as the effective suspension of immigration removed a major source of demand from the property market. More supply, less demand, cheaper housing.

Hopes dashed

But the hopes of many intending first homebuyers and up-sizers – at least those with stable incomes – were soon dashed. After dropping by just 2.1% between April and September prices rose during each of the last three months of the year. At 31 December 2020 CoreLogic’s home value index was up 3.0% for the year. Regional areas posted the highest gains (6.9%), but the combined capitals still managed a 2% lift despite the year’s horrors.

Why?

The reasons house prices held up include:

  • Income support. JobKeeper provided an income to many of those who would otherwise have lost their jobs, helping them to maintain mortgage payments and avoiding forced sales.
  • Record low interest rates. Those with good cash flow can afford to borrow more, pushing up prices and squeezing out want-to-be homeowners with less income.
  • Mortgage holidays. Lenders allowed hundreds of thousands of customers who suffered a loss of income to suspend their regular loan repayments for several months. While deferred amounts, plus interest, need to be repaid eventually, they provide valuable breathing space at times of stress.
  • Economic bounce-back. Getting on top of coronavirus saw economic activity recover more quickly than expected. This helped to boost consumer confidence, including the confidence to borrow at low interest rates.

When will the dream be (more) reachable?

Australian home prices have long been amongst the highest in the world. While much lip service is paid to “more affordable” housing, both politicians and central bankers are reluctant to implement policies that would drive down the cost of housing. Indeed, during 2020 the federal government proposed relaxed responsible lending rules, and the RBA cut interest rates to just 0.1%.

The result was a surge in borrowing, and while first-time homebuyers made up a significant chunk of those new borrowers, the accompanying rise in prices means many intending buyers were again priced out of the market. The outlook at the beginning of 2021 was that Australia’s decades-long real estate bubble was set to continue.

 

Who can help?

Buying a home is one of the biggest financial decisions you’ll ever make. It takes planning and maybe years of effort to achieve, but there are things you can do to let you start bidding sooner rather than later. Talk to our financial planners about strategies you can use to help you achieve your dream of home ownership.

Five simple steps to correct your credit score

If you’ve ever had a mobile phone, a credit card or any kind of finance – including a gas or electricity account – you’ll have a credit score.

Lenders check your credit score when assessing loan applications – the better your score, the more likely they are to lend to you.

Your score is based on factors such as:

  • money borrowed,
  • accounts like phone, utilities, etc.,
  • on time/overdue payments,
  • past credit applications.

The higher your score the better and you’re more likely to have loan applications approved and you may also be able to negotiate a better deal.

Conversely, a low score can influence a lender and make it difficult to secure a loan or credit.

Finding out your credit score is easy and it’s free. The government’s MoneySmart website provides details for reputable companies that can supply you with a copy of your credit report.

What if you find out your credit score is not looking too good?

Here are five things you can do to improve it.

  1. Firstly, what’s the story? Get a copy of your credit report. It shows things like:
    • credit products and providers,
    • credit limits,
    • repayment history,
    • bankruptcy and debt arrangements.

Ensure your details are accurate and up-to-date and contact the reporting agency to have errors rectified.

Now, review the information. Are there trends? Perhaps you’re paying bills according to your wage cycle even if that means being a few days late?

  1. Consolidate multiple cards and/or loans into one and cancel cards where possible. Fewer loan facilities are more manageable, it also looks better on your report.

Avoid applying for credit increases as any increase will add to your total credit debt. Additionally, applications for credit, and credit increases, are included in credit score calculations.

  1. Consider a ‘nil-interest balance transfer’. This is where you transfer your outstanding credit card balance to a new card offering zero interest for a limited time. Schemes like these enable you to quickly pay down debt during the interest-free period, but make sure you’re clear about the terms and conditions as penalties can apply.
  2. Where possible, reduce your credit card limits. Pay the full balance each month, or pay more than the monthly minimum when you can. Even the smallest amount can make a difference.

With personal loans, mortgages and council rates, pay on time – every time – and make additional payments whenever possible. Always pay rent and mobile phone accounts on time – it’s a recurring theme, isn’t it!

If you struggle to pay utilities by the due date, contact your provider. Many offer plans called bill-smoothing, where you pay a set amount each month. Goodbye bill-shock!

  1. Create a realistic budget based on your income and expenses, and include the due dates of your debts. This will help you synch your pay cycle with financial obligations. It will also identify any savings that you can use to pay extra on loans and cards.

A poor credit rating is not the end of the world, but repairing it can take time and discipline. If you’re not sure where to start, seek professional advice. It’s all about managing debt, prioritising and making your credit score work for you.