Current real estate downturn is a different beast from the 1989 recession image

Current real estate downturn is a different beast from the 1989 recession

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According to abc.net.au, the last time Sydney real estate prices fell by this much, home mortgage rates were at around 17%, unemployment was 6%, and Australia was heading into a recession.

What a contrast to the current real estate downturn, where new customers can get home mortgage rates under 4%, unemployment is at 5% and has actually been falling for the past few years, and the soon to be released official figures are expected to show the economy growing above average at 3.3%.

In spite of these near-boom conditions, residential and commercial real estate prices are falling fast in the south-east capitals and in Perth. This, of course, raises concerns as to why Sydney and Melbourne are recording huge property price falls while their economies are doing really well.

However, one factor does stand apart, and it is the very same trigger that caused the late-80s recession, and that is mortgage debt.

In 2018, home buyers can’t get the cash

Despite what numerous financial experts argue, the single most essential factor that determines home rates is credit availability. Very few individuals can buy their very first home without mortgage debt. Therefore, how much you can borrow will determine how much you can pay. Also, a lot of property investors rely heavily on debt for their real estate investments.

Just how much you can borrow depends upon how much banks are willing to provide you at a given time, given your earnings and living expenses. These lending standards have tightened, especially the evaluation of living expenses, which has attributed to the present housing downturn.

Housing credit is still growing albeit rather slowly. It has been growing at the slowest monthly rate since 1984 and the weakest yearly rate since 2013.

In 1989, people couldn’t afford the loan

Interest rates remained in the double-digits throughout the 1980s because inflation was also very high (primarily in between 6-10% in the second half of the 80s).

However, things took a turn for the worse when the average standard variable mortgage rate leapt from 13.5% in June 1988 to 17% in June 1989. This rise in the rate of interest in one year had two significant results.

First, it put numerous borrowers in extreme financial difficulty which caused some to sell either by choice or because they had actually defaulted on their loan.

Second, potential borrowers likewise would have been evaluated for loans at the higher interest rates, meaning their borrowing capacity was reduced – a comparable impact to what tighter lending standards are having now.

Therefore, as in today’s property market environment, smaller sized loans inevitably indicate smaller purchase rates.

In a recent speech by Reserve Bank Governor Philip Lowe, he stated that Australia needs banks ready to make loans in the expectation that some borrowers will not have the ability to repay them.

“If they become afraid to lend simply because of the consequences of making a loan that goes bad, our economy will suffer. So a balance needs to be struck here.”

 

This article first appeared on abc.net.au.

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