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People who cannot afford to pay their mortgages or sell without taking a loss are increasingly putting their properties onto the heated rental market instead.
Key points:
- House prices nationally have dropped nearly 9 per cent on average from their most recent peak
- Real estate agents are starting to see forced sellers who can no longer afford their mortgages
- Some people in negative equity are renting out their homes instead of taking a loss on a sale
Numerous real estate agents in Sydney and Melbourne say the trend is becoming more entrenched as mortgage stress escalates.
Jazmin Pfluger took ABC News on a tour of a small one bedroom apartment in Melbourne's inner-west that had been listed for sale for between $310,000 and $325,000.
The real estate agent said there had not been "enough interest at that price point".
"That's compared to 12 months ago when the market was doing really well for sales," she said.
"It's definitely changed a bit since then. The prices have dropped.
"So, a lot of owners are looking to rent, which is a good option at the moment with the [rental] price going up. It's extremely busy."
Leandro Quirino was one of the many people who inspected the apartment in Footscray that is now listed at $370 per week.
He is considering applying for it – despite the constant noise of trains running along nearby tracks.
"I don't think that you are finding something better for the same price," he said.
"Everything is more expensive. I think more people are just coming to the country and the price has gone up.
"The prices are just crazy."
And the story of this humble apartment in Melbourne is illustrative of the bigger picture.
Property prices continue to slide
Property prices boomed during the pandemic as interest rates plunged to record lows.
Values shot up by more than 25 per cent nationally and many people bought at or near the top of the market.
Now interest rates are rising at the fastest pace on record, with eight rate hikes already delivered by the Reserve Bank and more expected to take the cash rate up towards 3.5 per cent, and potentially beyond.
Variable mortgage rates are typically a couple of percentage points above the cash rate, leaving most borrowers looking at 5-6 per cent.
That is hitting the borrowing capacity of potential buyers, like Nilesh Shukla.
"Before the rate increases started I was getting [pre-approved for] something around $900,000," he told ABC News.
"But now when I approached the bank they say, 'We can lend you around $600,000 to $650,000.
"It's quite a substantial decrease."
In turn, the reduced capacity to pay is bringing down the price of homes further still.
The latest CoreLogic data showed home prices fell an average 1 per cent nationally last month and are now down 8.9 per cent from their most recent peak.
Sydney has continued to lead the peak-to-trough falls, down 13.8 per cent since the market topped out in January 2022, with the median home price back below a million dollars for the first time since March 2021.
However, Hobart and Brisbane are rapidly catching up, with steeper falls over the past month (1.7 and 1.4 per cent) and past quarter (5.5 and 4.8 per cent).
Tanmay Goswami is a real estate agent who sells homes in Sydney's outer western suburbs and has noticed the same trend as Jazmin Pfluger in Melbourne.
He has distressed sellers coming through his door who can no longer afford their mortgages as rates spike and inflation hits people's cost of living.
"We are getting now calls from lots of landlords," he told ABC News.
"They are struggling with the repayments, so they are looking to sell.
"All the inflation and other day-to-day costs has gone up, so they can't afford."
Boom's bust leaves many in negative equity
However, once they list their properties for sale, some sellers are finding they cannot get what they paid for them or even enough to pay off what they owe on the mortgage.
This situation is known as negative equity and it can potentially lead to bankruptcy for borrowers with money still owed to the bank even if the house is sold.
CoreLogic analyst Eliza Owen said this reality is now hitting home for those who bought recently, especially in localities that have seen the biggest property price declines, in some cases already above 20 per cent.
"It's quite possible that people have lost value in their homes," she said.
"And, depending on the size of the deposit they went in with, it could be that they're in a negative equity position now as well.
"It wouldn't be surprising to see more and more people struggling with higher mortgage repayments with the extremes that we've seen in interest rate movements."
She said it also wasn't surprising that people struggling to meet their mortgage repayments may look to rent out their properties instead.
Rents nationally have gone up 10.1 per cent, but CoreLogic's data show asking rents in inner-Melbourne have jumped almost 30 per cent over the past 12 months, while inner-Sydney rents surged more than 20 per cent from the COVID lock-down lows seen around a year ago.
Apartment rents in these areas are soaring as international migrants and people who went regional during COVID return to the big cities.
"And that's really where you're going to see a first response — people going back into share houses and things like that to try and alleviate rental costs," she added.
First home buyer Nilesh Shukla also just had his rent hiked.
It was around $500 a week and increased to $700 for his property near Sydney's Olympic Park.
"We have opened our borders. And because of that the demand has increased," he notes.
"And with the increase in demand, getting a rental is also difficult. Honestly speaking."
And that may just push him to buying a home instead as it would be the same in mortgage repayments, as long as the agent is willing to "negotiate".