My focus today is the housing market — I fear we’re sailing into dangerous waters.
Let’s start with interest rates. The Reserve Bank has spoken and, as widely predicted, rates are on hold — at least for now. But the big question is: where to next? I’m one of 32 so-called experts asked each month to forecast what the Reserve Bank will do at its upcoming meeting, and my forecast before that last meeting was no change. I guess I’ve got a different way of thinking to many of my cohorts. I don’t sit in an office studying graphs — I get out and talk to people.
Every employer I speak to, no matter what field they’re in, tells me the same thing: they can’t get staff. It’s especially bad in the building trade, where costs are going through the roof. According to Master Builders Australia, we’re short more than 200,000 tradies — and that gap won’t close any time soon.
Think about the Reserve Bank’s job. If the country is in trouble and needs stimulus, they’ll cut rates. If inflation is booming, they’ll hike them to try to slow things down. I don’t see any rate increases coming — not in the near term. But with things the way they are, there’s no way they’ll be cutting either. In fact, I’ll go so far as to say we may be at the bottom of the rate cycle, which means that last month’s cut may have been the last cut we’ll see for a long time.
Keeping in mind that house prices depend on supply and demand — and that supply is extremely limited — it’s obvious that demand is where we should be directing our thoughts. And it’s not good.
Adding fuel to the fire is the stimulus in the housing market created by the government’s first home buyer scheme, which allows people to buy with as little as a 5% deposit and no mortgage insurance. It’s well-intentioned, but it’s adding even more heat to an already overheated market. Every new incentive aimed at helping people into housing ends up increasing demand, which simply pushes prices higher.
Now think about the lenders
But there’s more to this dangerous mix — and think about what’s happening now in the lending area.
The banks are going gung-ho to lure borrowers directly to them and sidestep the mortgage-broking industry, keeping more of the profits for themselves. Commonwealth Bank has been advertising up to 300,000 Qantas Frequent Flyer points for new loans — enough to fly business class to Europe — and recently announced it’s prepared to offer extra borrowing capacity, up to $40,000 more, for applicants willing to rent out a room in their home to boost income. It’s clever marketing, but borrowers need to look past the shiny bonuses and ask whether the deal is really in their best interest.
40-year loans
At the same time, lending standards are slipping as competition intensifies. Great Southern Bank has joined non-bank lenders such as Pepper Money in offering 40-year mortgages. Extending a home loan from 30 to 40 years can make repayments look more manageable, but the cost is brutal. On an $800,000 loan at 5.5%, the monthly repayment is about $4,542 over 30 years (interest roughly $835,000) versus about $4,126 over 40 years (interest roughly $1.18 million). That’s around $345,000 extra interest for saving only $416 a month — and it risks people still paying the mortgage in their 60s or 70s, just when they should be thinking about retirement.
10-year interest-only loans
Even more concerning is AMP Bank’s new 10-year interest-only loan, which requires no reassessment of the borrower’s financial position during that period. It means borrowers can spend a decade paying only interest, building no equity and facing a sharp increase in repayments when principal payments begin. Without a mid-term review, there’s also no check on whether the property has held its value or the borrower can still afford to service the debt.
The warnings are coming
These products may make it easier to qualify for a loan, but they’re a step back from the more disciplined standards regulators fought hard to enforce. APRA has repeatedly warned lenders not to chase growth at the expense of prudence. It has long identified high loan-to-income ratios, extended terms, and lengthy interest-only periods as major red flags. The regulator insists banks maintain a serviceability buffer of at least three percentage points above the actual loan rate, to ensure borrowers can handle higher repayments, and it requires lenders to hold extra capital against riskier loans. The message from APRA is crystal clear: competition must not come at the expense of sound lending.
All this tells me we’re heading into choppy waters. The housing market is fuelled by emotion, and when confidence is high, people tend to take bigger risks. But history reminds us that easy money and loose lending standards always end the same way. If you’re thinking about buying or refinancing, take the time to run the numbers carefully — and don’t let bonus points or clever marketing cloud your judgment. As I’ve said many times before, wealth is built by keeping things simple and avoiding costly mistakes.
For borrowers, the lesson is equally clear. Don’t be seduced by offers of frequent-flyer points, small monthly repayments, or flashy new mortgage products. Always look at the total interest you’ll pay over the life of the loan, and think carefully about how long you want to stay in debt. The banks may be relaxing their standards — but you shouldn’t relax yours.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: [email protected].