In an exceptionally low interest rate environment, homebuyers are taking advantage and entering the market in strong numbers. Sale volumes are running at 487,000 per year in Australia, slightly up from a year ago, to be the highest in around five years.
For many buyers, once the contract is signed, the next major decision relates to finance. Certainly, one important choice is between variable rate mortgages (the default option for 89% of buyers, according to the Australian Bureau of Statistics, with direct exposure to future policy changes) or fixed rate mortgages (the less popular option, with more insulation from future policy moves).
For many, these financing options are a matter of individual choice and there is no one size that fits all. However, the interest rate gap between variable and fixed rates makes for interesting reading.
Currently, the central bank reference rates sit at 5.65% for variable and 4.8% for three year fixed. Of course, the actual rates for borrowers may even be lower. Importantly, that gap – at 85 basis points – is unusually large. In other words, strong appetite for fixed income assets from global investors is partly playing out as lower medium-term interest rates, even compared to already low variable mortgage rates.
How long will this last? How long will this pattern of firm fixed income demand and markedly lower fixed rates persist? It is impossible to say for certain. That said, fixed rate mortgage options are worth serious consideration, particularly given current pricing.
As a general update, price growth is still in a broad moderation phase, notwithstanding the near-term spike after the February rate cut. Overall, prices are still generally rising, albeit at a slower pace than early 2014. That moderation is definitely more acute in Perth (-2% per annum), where prices are now flat to falling. Meanwhile, price growth is still exceptionally strong in Sydney (+17% per annum), partly buoyed by sustained investor demand.