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Why the Mortgage Market Heats Up in Australia

With the recent rise in interest rates, some homeowners are looking to refinance. This is a great way to lock in a low interest rate for the short to medium term. In addition, it offers investors the opportunity to get ahead of future rate rises. Banks such as ANZ are reporting a growing proportion of fixed rate loans.

Demand outstripping supply

The current housing market is booming, with demand outstripping supply. However, this situation may not last forever. As a result, the banks are facing a tough task to expand lending to the housing market. With credit growth limited, Australia’s house prices will be unable to maintain their current levels.

Demand for housing is related to two factors: price and user cost. While the former is related to the amount one needs to borrow in order to finance a home, the latter is an estimate of how much it costs to maintain a home. According to Fox and Tulip (2014), the cost of housing in Australia varies depending on the price of the home, its running costs, and the depreciation value.

Since many home loans in Australia are variable-rate mortgages, the amount of money required to service a home loan can fluctuate with interest rates. To help alleviate this problem, the Reserve Bank of Australia (RBA) has purchased government bonds and established the Term Funding Facility. The purpose of this program is to provide banks with cheap funding and support the flow of credit in the economy. The population of Australia is estimated to be 25 million, with a majority living in urban centres.

Inflation impact on the housing market

Inflation affects the housing market in two different ways: it impacts the prices of housing and the interest rates that lenders charge. According to ABS figures, the annual rate of inflation will hit over 7% by the end of the financial year. As a result, households will likely have to tighten their budgets and cut their savings, reducing the demand for housing.

The Australian Bureau of Statistics released its latest figures for June 2022 and found that new dwelling costs increased by 20.3% in that quarter, the highest increase in the series and seven times higher than the average. This was driven by the shortage of building materials due to supply chain disruptions. Meanwhile, rents rose by 1.6% on an annual basis. While inflation does have an impact on the housing market in Australia, the level of price increases depends on which factors drive the economy.

Housing costs are one of the biggest components of the CPI, accounting for almost one quarter of the index. The CPI includes both new and existing dwelling prices. New dwellings and rents make up the bulk of the housing component. This index shows the real change in the value of homes and is a good indicator of inflation.

Young Australians trying to get onto the property ladder

With house prices more than 16 times the median wage, young Australians are finding it hard to afford a home. As a result, they’re taking on credit card debt and university debts. Even worse, unemployment is high; 11.8 per cent of people under 30 are unemployed.

While the current market has delivered incredible capital gains, it is important to remember that the market is not a static thing. While residential housing offers stability, security and long-term returns, young Australians who wish to invest in real estate must be realistic. A typical 25-year-old simply cannot afford to spend more than half a million dollars on their first home. In addition, the rental market is very competitive.

Luckily, there are a number of programs and initiatives designed to help young Australians get onto the property ladder. These include the “Youth Property Savings Plan” and the “Young Australians’ Guide to Home Loans”. These programs have been developed by researchers in Sydney and Melbourne and have been shown to be a valuable tool for those looking to buy a home.

Competition in the mortgage market

While the big four banks dominate the Australian mortgage market, other financial institutions compete for business. These include local banks, credit unions and building societies. Many of these financial institutions have rebranded themselves as banks over the past few years and are now customer-owned, putting profits back into providing financial services for their members.

Competition has increased in the mortgage industry since the GFC when the market was dominated by a handful of large players. Now, that it is easier to change mortgage lenders, more people are making the switch. This has increased the overall volume of mortgages in the market. This trend is likely to continue, as the economy continues to grow and consumers become more educated.

However, the ACCC has identified significant barriers to the effective competition of banks in the mortgage market. First, residential mortgages are often priced in an opaque manner, making it difficult for borrowers to shop around for a better deal. The ACCC’s Residential Mortgage Price Inquiry has documented this. Because of the high costs of searching for mortgages, many borrowers do not take advantage of the opportunity to compare prices.

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