Ep 43. The Mortgage Cliff: Debunking The Hype with James O’Brien
In this episode, Michelle and James O’Brien from Shore Financial explore whether the media's portrayal of the mortgage cliff matches reality and discuss its implications on property owners.
Here’s what you’ll learn from today’s episode:
What is a "mortgage cliff" and whether it is a real concern or media hype.
How changes in mortgage rates can affect property owners and investors.
The dynamics of the property market, including the current demand for properties, the impact on property values, and the reasons why people choose to buy or sell property.
Why varying predictions from economists about when interest rates will drop, highlight the ever-evolving nature of the property market.
Speakers in today’s episode:
Michelle May - Michelle May Buyers Agents
James O’ Brien - Shore Financial
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This podcast has been produced and edited by Snappystreet Creative
Please note that any views or opinions presented in this podcast are solely those of the speakers, and do not necessarily represent those of any business. These views and opinions are general in nature, and do not take account of your personal objectives, financial situation and needs. Please consider whether it applies in your circumstances and seek professional advice wherever appropriate.
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VIEW TRANSCRIPT
Michelle May: Hi, and welcome to another episode of the Buy Your Side podcast, the property podcast to help you make smarter property buying decisions. My name is Michelle May and I am the principal of Michelle May Buyers Agents here in Sydney. And today I want to talk about this mortgage cliff. Is it coming? Is it happening? What's going on?
And I didn't want to have just my opinion spouting out at you. I wanted to talk to an expert in the industry. So I'm very lucky to have James O'Brien with me here today. James is a lending specialist and a broker at Shore Financial.
So James, thank you so much for coming back.
James O'Brien: Oh, thank you for having me.
And your introduction is always way too flattering than I deserve, but thank you, it's lovely to be back.
Michelle May: No, you deserve it because you have helped out our clients time and time again, getting them better deals and making the process so much smoother for them than it has been previously.
So, I'm always eager to pick your brain because you're obviously on a slightly different side of the property journey for people. And obviously, the market's always changing. There are always news reports coming out and sometimes it's a bit hard to see the wood through the trees. And for me, I've got the boots on the ground and inspections talking to agents, talking to buyers all the time, but you're looking at it from a different angle.
So I'm very keen to talk to you about this mortgage cliff that people have been talking about, writing about, and reporting on the news. Your perspective, what are you seeing? Is this mortgage cliff a real thing or is it something that's been made bigger than it really is by the media?
James O'Brien: It's a bit of both. So it definitely is a real thing.
We're right at the peak of it right now. The mortgage cliff being where people have borrowed at really low rates or refinanced into really low rates. And they've had these lovely low fixed rates loans for one, two, three, four years. The majority of those loans are coming to their expiry right now. So August and September of this year is where the bulk of those loans are actually coming off their nice low fixed rates and reverting to much higher variable rates. So, that is true. That is occurring. The impact of that, I think, has probably been a bit oversold by the media, which is typical. That's what we expect from the media. If it bleeds, it leads, I think, is the cynical leads the news, leads the headlines. If it's a bad story, sell. Negative news sells. And so, they focus on that.
I do think it is a bit of a beat up though, and why I say that is the vast majority of people that have enjoyed these nice low fixed rates for, whatever the term was, two or three years, the majority of those were used to paying higher variable rates before they refinanced into these lower fixed rates.
So, they were paying higher rates on their loans and they just fixed at these nice low rates for a period of time. During that period of time, they managed to save huge buffers. So the reports show, stats show that the majority of people built up huge cash buffers in their offsets or in their redraws or just in their savings accounts during the COVID time when they couldn't spend any money.
And they had these wonderful low fixed rates. So that's the majority, I think. However, there is a large community or a big section of the population that bought or got their first, lending during these low rate environments where they could borrow more than they'd be able to borrow right now for instance. People that borrowed at their maximum and bought for the highest price they could. And didn't have any cash buffer left over, right now, if they come off their fixed rates and they haven't increased income and they don't have any cash buffer, they're the people that will struggle, they're the ones that will be struggling.
Michelle May: Yeah. I mean we're not talking just a few dollars. It's quite a significant jump from the rates that were around in 2021 versus what they are today. And you've got the increased cost of living overall. You go to Woolies and it's like a hundred bucks gets you two chicken breasts and a half a bag of lettuce and I'm laughing but my heart is bleeding. Like, we're fortunate we've got jobs and security and stuff, but not everyone is that lucky. So it all adds up and every time I open an email, it's like, oh, hi, just to let you know that my fees and services have gone up. So everyone's increasing their fees and services all the way down the road.
So from the people that you work with or see with and hear about in your industry, is it the same kind of percentage that are forced to sell time and time again, or is it a fair jump of people who are going, okay, I need to offload my property.
Is it a percentage?
James O'Brien: Yeah, good question. To be honest, for my client group, I haven't seen, I'm really grateful. Knock on wood, it remains like this. I haven't seen a big uptick in the number of people that would sell in a completely different rate environment. I've had a couple of clients over the last, I would say, 10 months say, look, James, there is a bit of pressure on me here. I'm going to sell that investment property I have. They haven't been forced into a situation where they're required to downsize with their owner occupied property. But I have a couple of clients, maybe two or three say, look, I'm considering getting rid of that investment property I've got, what are your thoughts? And my opinion would kind of vary from one to the next based on what their position looks like.
I'm really grateful that I haven't seen anyone be, with their back against the wall, needing to sell their owner occupied property to pay off the debt because they can't handle it.
I've got colleagues and friends that work in this industry that have seen that and that's tough. That's a tough position to be in. But I think overall, every client wants to get a better rate. So every single client that's on a variable rate that has gone sky high, most of them are reaching out and saying, hey, are you able to help me get a better rate? And those are those of my clients that aren't calling me, I'm calling them. I'm reaching out to them and asking if they want me to negotiate a better rate for them. Surprisingly not one of them has said no. They've all said, yeah, go on. If you can get me a better rate, I would definitely like that. Thank you very much. Yeah.
Michelle May: And so do you think from the investors, is it mostly because that's very much what I'm seeing? Obviously I talk to agents every day and they do tell me a lot. And from the ones the properties that are on the market, it tends the vast majority is that are forced to sell our investment properties. Do they tend to be from sort of more of the Mum and Dad investment? It'll be their first and only investment property.
James O'Brien: Yeah. The ones that I've had are like that. Maybe one of the two or three that I've had has had more than one investment property.
I actually remember the cases for these individuals. When they bought the additional property, the new property, originally they were living in their first property and they upsized into a bigger and better property and held on to their original property and turned it into an investment. And so they always had that kind of flexibility there. They thought, look, you know, I could sell this property, but why not hold onto it and just make it an investment property? And now things have become more expensive. They've gone, ah, you know what, I may as well sell it. So from my experience, the majority are kind of your Mum and Pop investors that just want to just have that one additional property to sell.
What I am seeing though, so whilst they're my kind of personal experiences, I'd be interested to see if you've observed this yourself personally, but what the kind of the stats are showing. is that the listings for this spring season are up 10 to 15 percent. Not year on year because last year was an awful year to compare to. There were record low listings. But this spring season, listings are up 10, 15 percent to the five year average. So, it indicates a real sharp uptick in listings. And what I'd put that down to is one, people being under pressure and having that second property to sell to make things easy for themselves, but also the kind of pent up demand of people that were looking to sell because the market hasn't, the market's kind of, you know, dropped massively last year and underperformed for a period .Since January of this year, property prices in Sydney have increased 8%. So, I think a lot of those people that kind of, you know, they were thinking about selling, they wanted to sell. But they weren't going to do it in a bad market. So they sat on their hands and didn't list that property. I think a lot of those people have now come out of the woodwork and they've gone, it's time for me to make that transaction, whether it's sell to buy or whether it's sell just because I want to get, I wanted, I always wanted to get rid of this property, but the market was not good. Now the market is good. So, I'm prepared to sell it. I don't necessarily need to, they're not put into a situation where financially they're required to, but the market's just better. And then of course there are those people that are required to sell because, you know, financially they're required to.
Michelle May: Naturally, the market's always seasonal, cyclical anyway, right? So we're now, September Traditional spring market usually you always get an upswing in listings and like just sitting here. I see my inbox just filling up with new listings and that hasn't happened for a long time.
James O'Brien: Is that, is that relieving to see?
Michelle May: Well, yes, for my clients, definitely, because we've been really struggling. But the other thing we struggle with for our apartment buyers is that a much larger proportion of those listings are investor owned, but they're not vacant possession. So they still have in some cases, tenancies in place until next year, which means, we predominantly work with owner occupiers. We do work with some investors and that's great. Then you can just take on the current tenants, but for our owner occupiers, it's not an option to wait to move in until June next year. But that also to me sounds like then, well, if you're an investor and you just signed a new lease with tenants in June, you're under financial pressure to sell now, because why would you sell with the tenancy in place, because typically those types of properties do not sell from maximum results because, you're cutting out a huge part of the buyer pool, because you're really genuinely only gonna appeal to other investors out there.
James O'Brien: You can't style a property either.
Michelle May: You can't style it. You're completely at the behest of your tenants. And I've seen some investment properties that are amazing, but others where the tenants are clearly, let's say, annoyed.
James O'Brien: And they've made no effort to kind of tidy up or present the place well.
Michelle May: No. And I mean, you know, you can't really blame them either.
If the shoe was on the other foot, how pleased would you be to have strangers dropping into your home.
James O'Brien: 20 years ago, like when I was, early twenties, I had exactly that. I was living in Perth at the time, property we were renting was getting sold. And to be fair, we were nicer. We were worried that we'd get booted out if we didn't look after the place well. So we always presented it nicely on the weekend for the people that were coming through, but it was definitely irritating. It was a real inconvenience having to kind of, have people traipse through a property that we didn't even own every week. So I can understand why people would be frustrated at that. But I feel for the owner who's trying to sell the property, because if it's not being presented in the best light, that's going to, you know, impact them.
Michelle May: Yeah, absolutely. I can better your story actually. When I first moved to Australia, we moved to Brisbane and we were looking for a home. There was a house for sale in Barden.
I don't know if you know Brisbane at all, but it is a beautiful suburb. And it was a beautiful quintessential, little house and it was tenanted. It was three bedrooms. So it was everybody who was the typical you know, young couples with babies and pregnant, you know, they were traipsing through the house, but it was tenanted.
And I kid you not, it was Saturday morning and the guy, the tenant, was sitting on the lounge in his underpants, no shirt ,smoking, watching Rage at full volume. And these people were just literally walking in and out. Some rooms were so full of junk that they couldn't even, you had to wedge your head around the door. You couldn't even get into the room. He was annoyed, but being the property flipper that I am, I could see the potential, so I bought it. But there was very little competition for that property.
James O'Brien: Surprise, surprise. Does he come with the house?
Michelle May: We made sure we got vacant possession, right? That's the key here. Get vacant possession.
James O'Brien: That brings back memories though. Lying on the couch in my underwear, smoking, watching Rage. That's great. That's a well spent bunch of years in my youth.
Michelle May: Aren't you glad we had our youth before social media?
But look, I mean, it is definitely what I'm seeing on the ground and I'm talking to agents as well that, the investors, the first thing that's going to go are the surplus to requirements in a way, the last thing that's going to go is your primary place of residence. And like you said, if there's very little of a mortgage on that investment anyway, because they've moved on.
James O'Brien: I agree with you though. I read this great report by an economist at Deloitte going back to, I think it was around the time of the Royal commission. When there was a decent drop in property values at that time, or maybe it was the beginning of COVID.
Same thing. There was a lot of talk about the property market tanking. Same like with this, you know, this mortgage cliff that they're talking about. There's all this kind of rhetoric about, Oh, the property market is going to collapse. And every time it hasn't happened. And why is that? It's because of the demand.
And even at the moment with this record number of listings we're seeing or this huge upswing in the percentage of listings compared to the five year average, there's just so much demand out there. There's equal to the number of people that have not wanted to sell because the market hasn't been ideal.
Well, there's, bucket loads and bucket loads of people that have wanted to buy over the last 18 months, haven't been able to because there hasn't been the stock. So that demand has just continued to grow and grow and grow. So even though there's heaps more listings coming out, everything's getting snapped up.
You know, the mortgage clearance rate, auction clearance rates are still, mid seventies. It's huge. That indicates a hot market, anything above 70%. But at that time when the last time, not the most recent one, the last time there was talk about the market collapsing, all these economists were saying doom and gloom, except this one guy from Deloitte who did this great report, he just went no, the market's going to be fine. And the reason for that is the Australian dream is to own property. Not one person that can avoid selling their property is going to sell their property. They're all going to do whatever they can to hold on to their home. They'll tighten the belt wherever they need to. They'll sell a cat or a dog, they'll get rid of their vehicle, they'll stop UberEats, they'll cut alcohol out of their diet if they need to. Take their kids out of school. They'll put them into a local public school before they sell the place they live in.
And so I love that about our culture and I always think of that whenever there's talk of the property market taking a bit of a dip.
Michelle May: And it's always a conversation that I have with potential clients. You know, they go, Oh, I want to pick up a bargain. And I said, the only bargains you're going to get are going to be on main roads, you know, or in places that have low desirability, which are not the kind of properties you should be buying in the first place.
Because currently I am waiting as we speak to hopefully get an offer and acceptance on a property that first opened on Saturday. Today is Thursday and it's going gangbusters. It's a two bedroom apartment in Ashfield. And I can't tell you the amount of growth that I've seen in Ashfield in the last couple of years.
James O'Brien: I shouldn't say bizarre, I should say amazing. It is huge growth and you're absolutely right. It's the next kind of logical and geographical step out for the inner west, right?
Michelle May: Absolutely. But the number of buyers that are queuing to get into every single listing there is crazy. And then we are now in a position where, we're telling clients like if it's a good property, we have to try and get it prior to auction because at auction things are for the good quality property, not across the board, but for the A class property, there's not enough of them, particularly houses, three bedroom houses that have been renovated.
There's a lot of demand. There's a lot of demand. So I think that you've now confirmed for me that we're not going to get this influx of properties particularly because investors also tend to own apartments versus houses in the inner ring of Sydney. So if you're looking to buy a house Then just go full force ahead and focus on trying to find the right one, don't, don't wait for this cliff to appear.
James O'Brien: The cliff that they're talking about. When people refer to the cliff, just for my clarity, are they talking about a cliff in terms of property values? Are they talking about a cliff in terms of what your repayments are going to look like?
Michelle May: I think the cliff is more like, there's going to be such an influx of properties coming to the market that their full prices are going to come down.
James O'Brien: That's where I reckon there's a huge beat up. And the reason for the beat up is I do think the majority of people are used to paying more, which is how they were able to build up these huge buffers during their low rate environment, which was fairly well reported on TV. If anyone didn't see how that was reported on TV, the banks were able to disclose, obviously they don't give away private information about clients, but they're able to disclose what the average savings was per household and savings, jumped because of these low rates and also people not spending as much because everyone's locked down.
So, look, they were used to paying more for their mortgages. So when they come off these fixed rates and they go to paying higher rates, they just go back to something they've done before in the past. That's the majority of people. And then other people, they're just going to tighten the belt. They'll tighten the belt and they'll hold on to the property until rates come down, which, you know, which is, is sounding like it's going to be sooner and sooner.
It's a very dynamic market we're in, you know, every couple of months things change radically, but the most recent change is that economists are now forecasting rates decreasing sooner rather than later. So CBA most recently said in the first quarter of next year, they're expecting rates to come down. And drop by almost a full percent by the end of next year. Other economists have said, potentially even by Christmas, rates are going to start coming down.
Michelle May: But that's always the risky thing, James. In my experience now, I've been doing this since, you know, the crack of dawn, beginning of time. And if you put four economists in the room, you're going to have five different opinions.
James O'Brien: Even, even the big four banks. Like, I actually have it because I don't, I can't remember all this off the top of my head. I've got this on a screen in front of me. So CBA say the cash rate will peak at 4.1 in June of 2023 and then drop to 3.35 percent by August, September of next year.
Westpac peaked at 4.1 in June, then dropped to 2.6 percent by December of 2025. NAB thinks there'll be one more increase of 25 basis points by November. So, peaking at 4.35%, November of 2023, then dropping to 3.1 in February of 2025. ANZ, peaking at 4.1 percent in June of this year, and then dropping to 3.35 percent in May of 2025.
So even with the big 4 banks, there's no consensus. You know, three of the banks agree that the rate has already peaked. So one of them, so 25 percent of that group disagree. And they say there's going to be another rate increase, but then every one of those four like you said, four economists, that essentially is four economists. That's the four chief economists of those big four banks. None of them agree. And up until recently all of them had said doom and gloom until, the first rate decrease will be, you know, back half or end of next year. And it's only recently that things have backflipped. But if you go back to the middle of this year, all the banks were saying, you know, oh, good forecast rates will decrease by later this year or early next year, and then inflation figures came out, they'd spiked. The RBA put up rates two months in a row and all those forecasts changed and all those forecasts changed to doom and gloom. It'll be another 12 months till rates come down. Inflation figures for the past couple of months have shown that inflation is coming down faster than forecast. And I think the reason for that is people, we're now at that, you know, the peak of the mortgage cliff where everyone's coming off those fixed rates.
People have less cash available, so people are spending less and that's why we're quickly seeing inflation come down, which is great. But now all the economists have changed their forecast again. And it's gone from super doom and gloom to, well, you know what? The rates could come down sooner than we said. You know, we've changed our mind again. I know we changed our mind two months ago and two months before that we changed our mind.
Michelle May: It's like weather forecasters. I think those are the only professions in the world where you can consistently get it wrong. It wasn't as I thought it was going to be so I'm going to change what I said. Forget about it.
One of the reasons why I wanted to really have you on the podcast was one of your newsletters that you sent out recently. And if you're not subscribed to James's newsletter, I highly recommend that you do. You mentioned that the buffers from some of the big banks are coming down. Can you explain that to us, what that may mean, what, what, what's actually happening there?
James O'Brien: There's two different areas there. There's new borrowing and then there's refinancing. Now there's half a dozen or so lenders. I mean, the lenders that I have available and our company, Shore Financial, have available, there's about 60 different lenders that do residential home loans. Of those lenders, there's six, seven lenders that have reduced their assessment rate for refinancing.
So what that means, an assessment rate is the interest rate that the bank uses to calculate how much debt you can afford. So how big a loan you can have. Now, the rule is APRA told the banks to take the interest rate on their home loan and add 3 percent to it. So, we're essentially adding a buffer of 3%, so if rates go up by 3%, we still know that our customers can afford it.
When it comes to refinancing, the banks have gone, well, if we apply that 3 percent and they can't even afford the size of the loan they already have, we'll give them a break and the break that they're able to give instead of applying a 3 percent buffer, they'll apply a 1 percent buffer.
So it just means you've got a stronger borrowing capacity, a better chance or a greater chance of being able to refinance the existing amount of debt you've got, to a lower interest rate at a different bank. Does that make sense?
Michelle May: Yes. So, that would then help with that perceived mortgage cliff not actually happening because the banks are actually going, listen, we realise it's been full on in the last couple of years. So, by doing so, we're actually giving you a greater chance of still having a mortgage as opposed to defaulting.
James O'Brien: Exactly. You won't need to sell your house. You can refinance because typically when someone comes off their fixed rate, they'll go to a very unappealing variable rate at their bank.
Now, if you're dealing with a broker, so I would, for my clients, as their fixed rate comes to an expiry, I'll go to the bank and I'll haggle the best possible variable rate that they can get at that lender. If there are better rates elsewhere at different banks, we present that as an option, and if my client wants to refinance, we facilitate that.
But yeah, if a client is stuck at their existing lender because they can't refinance to a lender that has a 3 percent buffer, there are now half a dozen or seven banks that use that lower buffer. So, as you said, it just means people aren't forced into a position where they have to sell. Yeah, which is great.
And APRA actually has that as a rule for all lenders. They're allowed to make an exception for people that are kind of trapped at their existing lender, they're referred to as mortgage prisoners. Rather than becoming a mortgage prisoner, a bank is allowed to apply a lower assessment rate to help them refinance.
Michelle May: That's good news. So, if you find yourself in a position like that, I think definitely reach out to James and they can help you sort out those issues with your bank.
James O'Brien: So, in addition to that, for new borrowing, there's two lenders, two non bank lenders that have also a decreased buffer for new borrowing.
Now the rule is still with APRA is that you need to have a 3 percent buffer for new borrowing. However, these two non-bank lenders, they don't necessarily need to follow all of the guidance by APRA because they're not banks, they're just lenders. And so, they can apply a lower assessment rate for new borrowing.
So, there's a couple of banks out there, which is helpful for people that are really dead keen to buy a place and just need a little bit stronger borrowing capacity. They can achieve that with these non bank lenders. They typically have slightly higher rates, but if that helps a person get their foot in the door.
No pun intended. Then that's kind of, that's where they come to the fore.
Michelle May: And are they, how shall I put it, as safe as houses as going with the traditional lender?
James O'Brien: They're fine. I mean, their rates are just a bit higher, so they're a bit more expensive, but otherwise they are reputable brands, they're reputable lenders that have been around for decades. They still have to adhere to the national credit code. They follow the vast majority of the guidance by APRA. So they're very much in line with the big banks. There's a few areas where they're allowed to make exceptions.
So they can deal with people that have bad credit scores or bad credit reports, whereas the big banks won't do that. These guys will use lower assessment rates, which help people borrow a bit more. Whereas the big banks won't do that.
Michelle May: Okay. Well, that's good to know. Again, this is one of the reasons why you really need to talk to a broker as opposed to just walking into a branch of a bank, because they're not going to tell you all these insider things that James knows about.
Thank you, James, for being with me again today. You always bring such a wealth of knowledge.
James O'Brien: My absolute pleasure. As always, thanks for having me. It's just great to be here.
Michelle May: Thank you. Now, if you want to get in touch with James, James, what's the best way to get in touch?
James O'Brien: Give me a call 0415 391 002, or you can send me an email, jamesobrien@shorefinancial.com.au
Michelle May: Excellent. Thank you, James. If you have any questions for James or myself, send me an email at hello@buyyourside.com.au. I hope you found this episode helpful and until next time. Thanks so much.