2021 was such a volatile but ultimately profitable year for many Australian property owners. With COVID recovery continuing, Government grants, supply issues, and a FOMO (fear of missing out) mentality, property prices in most areas outpaced many estimates. From conservations with lenders, we have put together a top 5 focus points for 2022 that property owners should keep in mind.
Debt to Income & Loan To Value Ratios
Debt to income (DTI) is basically looking at how many dollars of debt you have to how much you earn. Loan to value (LVR) similarly is how much a level of debt is compared to the property value. High DTI and LVR are a concern for lenders, as increased interest rates, cost of living raises, and potential longer term property value declines can cause issues for future mortgage servicing. Already last year we saw many lenders prefer mortgages with a lower DTI and LVR with policy changes that will auto-decline loans above certain DTI and LVR tolerances. This is nothing new, only that the new DTI and LVR benchmarks are set lower for certain lenders than in previous years. Maintaining lower overall debt levels, and higher deposit amounts (sometimes competing goals) may assist future property purchases.
Interest Rate Increases
With record low for longer interest rates, it was only ever a matter of time before these start to rise – and 2022 could be that time. While longer term fixed rates have already risen in 2021, an official cash rate increase in 2022 would likely be a green light for lenders to raise their interest rates overall. Current property owners should start to assess how even a moderate increase would effect them, and new borrowers factor in how this may effect their borrowing limits.
Property Prices Potential Dip 2023
While it can be argued fore and against whether property is in a bubble, there are still likely external forces pointing to a potential dip in 2023 (Corelogic 2021). While the first half of 2022 is less of an issue, valuers may be more acutely aware of a property slowdown and start to adjust valuations later in the year. Locking in new borrowings and re-finances in the first half of 2022 could be one strategy, or others may wish to wait until 2023 to see which areas are exposed to such declines. 2021 has already shown that while most areas have boomed, even in a hot property market there have still been many areas featuring declines in value when adjusted for inflation.
Casualisation Of The Workforce
While many workers think their jobs are safe in a full time capacity, the on-going casualisation of the workforce may lead to unexpected changes in work force participation (Deloitte 2021). Lenders do accommodate casual workers, and with a higher amount of casual workers, this may in fact favour such workers with positive lender initiatives. With this in mind though, borrowers should still understand that stable, long term employment is preferable to lenders, with short employment times, and industry changes, adding to difficulties in obtaining finance. Additionally, casual workers need to accept that most lenders will also annualise their income over 48 weeks, and not 52, which can make servicing a harder task on applications with casual employment – though not a reason in itself typically for an auto-decline.
Real Inflation – Gap Between Wage and Cost Of Living Increases
The simplest way to think of inflation is a lessening of your purchasing power. $32K in 1970 could buy a property (source my parents) and wages were around $6000 a year on average (Australian Bureau of Statistics). With inflation, while wages have also increased greatly since then, it is easy to see how house prices alone have dramatically increased at a higher rate. This is a common theme in inflationary environments where prices can easily rise quicker than wages. Borrowers need to consider preparations for budget adjustments to assist with current or proposed finance facilities, and also ensure they have means to assist in wages keeping pace with cost of living increases such as up-skilling, job promotions, change of industry, or current employment wage increases.
While the above may or may not eventuate, planning for such eventualities can be an easy and rewarding exercise to do. With thoughts of inflation, work, and life changing events, this can also aid in personal and professional reflection, planning and development. With property being such a long term investment, such long term forecasting and planning is an essential and typically motivating activity to perform.
Orchard Lending is a proud partner with Core Logic for property statistics and data referencing. Ask for your free property report today by using our contact us page – https://orchardlending.com.au/contact-us/
Australian Bureau of Statistics – Average Weekly Earnings Sept 1970 – https://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6302.0Main+Features1Sep%201970?OpenDocument=
Core Logic report on 2021 property here – https://www.corelogic.com.au/news/australias-best-of-best-property-performers-2021.
Deloitte – The Future Of The Workforce Report – Future of the workforce | Deloitte Australia | Human Capital Consulting Services, Reports