Sydney and Melbourne property prices still show no signs of peaking.
That is even with the next change in interest rates, when it comes, expected to be up and unemployment now above 6 per cent and perhaps rising. Melbourne has a bumper number of auctions this weekend, following the usual pattern of a spike before the lull of the AFL grand final weekend.
It is the same in Sydney, which is expecting a large number of auctions next weekend, the week before the long weekend. Once the footy finals are out of the way expect some very big weekends of auctions as the spring property season hits its straps. Sydney prices have risen by more than 14 per cent over the past year.
Melbourne prices have risen by more than 7 per cent over the same time, with much of that rise occurring over the past three months. Auction clearance rates in Sydney have been running at about 80 per cent and well over 70 per cent in Melbourne on heavy volumes.
Clearance rates like these are indicative of hot property markets. There is no mystery as to why prices are booming. Apart from oversupply in some parts of both cities, especially Melbourne inner city apartments, there is generally a scarcity of property in both cities.
Population growth in both cities is expected to continue to be strong. But it is the record low interest rates that have provided the real fuel to price rises as would-be buyers have been able to borrow more.
Until interest rates start to rise, it is likely that prices will continue to rise. Upgraders have a buffer in that they will have built up equity in their first property and many are ahead on their repayments. First-time buyers, in particular, have to be very careful.
At some point interest rates will have to increase back to normal levels and that could put first timers under real pressure. The bigger the deposit the better. Having a deposit of at least 20 per cent of the purchase price will save up to $10,000 in mortgage insurance.
That is because those who borrow more than 80 per cent of the purchase price take out mortgage insurance. Although it is paid for by the borrower, the insurance actually protects the lender if the borrower defaults.
On repayments, a good rule of thumb is to keep repayments at less than 30 per cent of the home buying couple's gross income. It is likely that when rates do rise they will not have to rise by as much as in past interest rate cycles given the size of the typical mortgage.
But still, a buffer of at least 2 percentage points on interest rates is prudent. In other words, be sure you are able to manage an increase in repayments if the mortgage rate you are paying was to rise by 2 percentage points.
And while high unemployment is always the bluntest instrument to stop house prices in their tracks, economists say the jobless rate would have to hit 9 per cent for property prices to collapse which, they say, is unlikely. The most likely break on rising prices is higher interest rates.
