Residential prices down 8.6% – but is worse coming for new village customers?

The GFC taught us that when residential sales collapse, village sales collapse. Customers decide to wait until values revive “as I know what my home is worth”.

This current dip in home values has seen Sydney prices drop 8.6% since this time last year, according to CoreLogic, and the number of properties for sale by auction last week was around 1500, down from 3600 a year ago. Covid is keeping sales strong – but this might change dramatically, and soon.

The reason? Four years ago, the banks abandoned the standard “service interest rate” of 7%, changing it to 2.5% above the mortgage borrowing rate. This is the safety level banks want when testing if a borrower can afford rate hikes before they lend.

By changing the formula, it now means all the mortgage borrowers who bought in at 2.5-3% could be hitting a ceiling when mortgages rise to 5-5.5% – and that is close.

Experts are very worried that there will be large-scale distressed sales of people who have reached their repayment limits, especially with household inflation approaching 8% and immigration increasing (Australia had the largest immigration month in October on record).

Most people will give up everything to pay their mortgage, but distressed sales headlines have a confidence impact.

Village operators must keep a close eye on their funnel of leads and pricing policies. It is a watch and see game for the next six months.