Regional roundabout

“There’s been a shift in affordability in many of our regional markets … how far your dollar goes in many of these regional markets have been diminished, because we saw such a significant increase in price during the pandemic,” Ms Powell says.

Which regions have been most in demand?

Indeed, the surge of people moving to regional Australia had resulted in a corresponding surge in house prices. The demand for housing in the regions has been such that regional house price growth is yet to subside at the same pace as the capitals. In fact, according to Domain’s latest figures, combined regional house prices lifted 3.6 per cent in the year to December 2022, while combined capitals fell 5 per cent.

South Australian regions have been the winner for house price growth, reporting a 16.8 per cent increase in house prices in the year to December 2022. This was followed by Western Australia (up 7.5 per cent) and Queensland (up 6.3 per cent). NSW and Victoria have seen the softest increases, with regional prices in the two states up 1.4 per cent and 1.7 per cent, respectively.

Speaking to The Adviser, South Australian finance broker Mark West (from Loan Market Clare Valley) confirmed that the region had seen a significant influx of people, adding that there were no signs of people leaving. “Just locally, I think there’s just general increased activity, commercially and population,” Mr West said.

“The coffee shops seem busy, there’s been new business start-ups. The main street always seems quite busy now, but it wasn’t that long ago when you [only] had moments when it was busy.”

Mr West noted there had been a psychological shift, whereby people are more “lifestyle focused” and the regions continue to meet those needs.

What goes up, must come…

But things aren’t necessarily going to stay this way forever. While regional property prices saw huge gains during the pandemic, the country’s most popular lifestyle markets have been hardest hit by softer market conditions and rate increases, according to the latest CoreLogic data.

CoreLogic’s Regional Market Update, which examines Australia’s 25 largest non-capital city regions, shows 13 areas recorded an increase in house values over the year to January 2023, down from 21 over the year to October 2022. For example, the upmarket coastal and hinterland Richmond-Tweed region in NSW recorded the weakest performance across all metrics registering the lowest annual growth rate (down 18.6 per cent) as well as the largest drop in sales volumes, the longest days on market, and the highest vendor discounts.

But despite the drastic shift in market conditions, houses in the region are still up 23.7 per cent on pre-COVID-19 levels.

CoreLogic’s head of research Eliza Owen said the recent fall in values was “unsurprising” given the region saw house values increase more than 50 per cent during the pandemic. For example, houses in the Illawarra region, 90 km south of Sydney, recorded the second-lowest yearly change of down 12.6 per cent after values surged 44 per cent through the recent upswing.

In addition, the Australian Prudential Regulation Authority (APRA) increased the serviceability buffer for mortgages in 2021, so that lenders would be required to assess loans on a borrowers’ ability to meet their loan repayments at an interest rate that is 3 percentage points over the loan product rate (up from 2.5 percentage points). This has started to make serviceability more challenging now that the cash rate has gone up by more than this amount (3.25 percentage points at the time of writing), leading to some borrowers becoming “mortgage prisoners”.

The boom in regional house prices and serviceability constraints has therefore made purchasing a new property even more challenging for regional communities.

Speaking to The Adviser, Karen Bashford, broker principal at South Coast Business & Financial Solutions in NSW’s Shoalhaven region, said a lot of people had been “priced-out of the South Coast”. “Purchasing a property if you work for a small regional company has become incredibly difficult, with even the more affordable suburbs now [having] doubled or tripled in price since pre-pandemic levels,” Ms Bashford said.

As such, Ms Bashford said she was spending “a lot of time prepping customers to get into the market”, such as budgeting, savings projections, and also giving them the information on what they will be spending once they are into their new home.

“We have been having lengthy discussions with customers around how the lender and rate they choose affects them, and giving them projected figures for repayments at higher rates so they can start considering what impact this will have on their weekly household expenses,” she said. In addition, the lack of housing stock has meant that local businesses are struggling to retain staff. “Our local businesses are having to close, or not operate at full capacity, because people cannot find homes to live in, and end up moving out of the area,” she continued.

“There is a massive challenge ahead for small businesses to attract and retain staff, but then for the local community to have enough affordable housing stock for those people to buy or rent.” On the flip side, the current downturn has meant other customers are preparing themselves to purchase an investment property as the market softens or existing home owners are seeking advice on using their equity. “There has been lots of discussions around how people use their equity and position to get ready for a new investment,” Ms Bashford said.

Regional sales lose steam

As lending requirements tighten, property prices increase, and interest rates continue to rise, demand for home purchases has also dwindled.

CoreLogic estimated that in the 12 months to January 2023, there were 500,550 sales nationally, down 19.1 per cent compared to the previous year. (However, sales estimates remained 4.6 per cent above the decade average.) The weakened demand was also reflected in the latest lending data from the ABS, which found new loan commitments fell by 3.7 per cent to $24.7 billion in November 2022, following a 2.8 per cent fall in October.

“No matter what market you’re in, its clear demand has slowed as a result of reduced borrowing capacity, inflation and rising interest rates — impacting all buyers,” Ms Powell has said.

“I think that changes a mindset of a potential buyer to: ‘How much mortgage am I willing to take on? And how much debt do I want to get into when interest rates are expected to continue to rise?”

The drop in new sales has been reflected across the country, with Mr West adding there had been “practically no construction” loans and only a small portion of first-time buyers and upgraders. Instead, his primary business is now refinances and “top-ups” — people seeking an additional $20,000 or $30,000 — as the cost-of-living pressures sting borrowers.

“At least 50–60 per cent of what we’re doing is refinances,” Mr West told The Adviser.

It’s a trend reflected across the nation, with ABS stats showing that refinancing jumped 8.2 per cent to a record high of $19.5 billion in November 2022.

“We’re actually quite busy, but what we’re doing is not profitable. [There’s] not really too much purchasing as a percentage going on,” Mr West said.

Indeed, the surge in refinances has also meant an uptick in clawbacks (see the February 2023 edition of The Adviser for more). “I think there must be a better solution,” Mr West said.

“We spend all that time and we still have fixed costs. But, two years down the track … you’ve got to pay back all the money you earnt on the original deal. It seems an odd quirk of an industry.”

Serviceability constraints

Over in Queensland’s portside city of Gladstone, which relies heavily on the resources industry, property prices had been falling by up to 60 per cent following the completion of resources projects over the last decade. But, the tide is turning.

Senior adviser Chris Maguire at Loan Market Gladstone said: “The local property market has been through a roller-coaster … [however], over the last four years, we have seen a strong recovery in home values around the area.”

According to Domain, median property values in Gladstone have jumped 46.5 per cent in the past five years, going from $276,500 in 2017 to $405,000 in 2022. However, it’s not good news for all borrowers. Mr Maguire said that while the lift in price values has allowed “previously equity locked” borrowers to start exploring opportunities, many are now locked into loans around 7–8 per cent.

“The difficulty these borrowers have is that they have picked up a lot of smaller credit products since buying the house … [such as] the four-wheel drive on finance along with a jet ski or something else. [Therefore], they don’t meet serviceability,” Mr Maguire said.

“That’s a difficult discussion to have with clients; they don’t understand how they can be paying 8 per cent variable rates with their current lender, but are unable to pass the affordability assessments at a lower rate elsewhere.”

For first home buyers entering the market, Gladstone remains a well sought-after region with a lower price point comparable to its city counterparts, he added. “In Gladstone, first home buyer (FHB) activity continues to increase, which is obviously in contrast to the city markets,” he said.

“The FHB segment is targeting a really broad array of stock but the median is in the $400,000– $450,000 price bracket. You can find a perfectly fine established four-bedroom house for that money in the area.”

Regional resilience

CoreLogic’s Tim Lawless said regional areas that are much more connected with their local economic factors, such as agricultural and resource sectors, tend to be less impacted by the interest rate hiking cycle and property price falls. For example, areas like the Barossa Valley in South Australia, the New England region of NSW, and the Riverina areas are driven by agriculture. “It does look like the areas that are performing a lot better now seem to be those markets that are more remote from the capitals … where the local economies are generally much more intrinsically linked with things like agriculture or resources,” Mr Lawless said.

“I don’t think these markets are going to have a real material impact from higher interest rates.”

However, some of these communities have also been heavily impacted by natural disasters and flooding, which has been dampening prices. According to the Bureau of Meteorology (bureau), Spring 2022 was the second-wettest on record for Australia, with NSW having its wettest spring since records began in 1900. “For the state overall, the total spring rainfall of 302.9 mm was 136 per cent above the 1961–90 average, exceeding the previous spring record of 260.8 mm in 2010,” the Bureau said.

Finance specialist Kirsty Colliver at Flair Finance in Dubbo said it’s been a challenging time for clients, who had been recuperating from droughts only to be hit by floods. Dubbo recorded 344.4 ml of rain in spring 2022, trumping its previous record of 286.4 in 2005, according to the Bureau. “There has been a flood, a drought and COVID-19 affecting borrowers in the past couple of years,” Ms Colliver said.

“Being able to see my clients face-to-face helps in a regional market — people like to be able to sit down with you to discuss their challenges,” she added, flagging that natural disasters had been making this harder.”

Mr Lawless noted that, despite the challenges regional markets have faced in recent years, “the broad story here is a much stronger performance through this pandemic cycle” across regional Australia.” “That will be a legacy of COVID-19, that more people want to live in these areas,” Mr Lawless said.