The recent Cash Rate rise announced by the Reserve Bank of Australia was higher than most analysts expected. In addition, inflation had just hit its highest point since the early 2000s when GST was introduced.
Under these circumstances, it is not surprising that we’re all wondering when inflation will level out and how many interest rate hikes, we will have to endure along the way. This leads to the obvious question of how these tough economic conditions will affect property prices.
It is clear that the RBA is taking a hard stand in controlling the highest inflation the country has seen in decades. Let’s take a look at current housing market conditions.
Why was the cash rate increase so high?
The RBA cash rate increase in May was the first such increase in over ten years. Still, the bank wasn’t done yet. It raised rates again in June by an unexpected 0.5%. This was the highest rate increase since February 2000. You have to look back all the way to August 1994 to find an increase higher than this at 0.75%.
The bank uses interest rates to manage inflation. A sharp increase, such as the one we’ve just seen, will reduce demand. When people and businesses face high-interest rates, they are less willing to buy on credit, dampening demand.
Lower demand has a negative effect on unemployment which can cause a major reduction in economic activity so interest rates must be carefully managed.
Right now, the Australian economy can cope with higher rates because unemployment is at an all-time low, wages are rising, and savings are increasing. Recent property price growth has left Australian households wealthier, and interest rates are still low though rising.
Banks have set an interest rate buffer of 3% to help borrowers cushion the effects of rising interest on monthly expenditure.
Many wonder how many rate hikes it will take to bring inflation under control. This is especially because many of the inflationary forces come from outside sources. Record oil prices and supply shortages will continue to drive prices upward.
The increased rates will eventually dampen the bank offsets making it more difficult for householders to manage burgeoning costs.
Residential real estate is also positioned to weather interest rate hikes because, in most significant cities, demand will outstrip supply for the foreseeable future.
What does the future hold?
Rental markets are thriving, drawing ever-increasing rentals. Vacancy rates are at a record low. This will continue to attract investors to build and buy residential properties. First-time home buyers will also make good use of recently introduced government incentives.
Now that the borders have reopened expect foreign student numbers and migrants to flow back into the country.
In recent years, the construction of apartment buildings and other residential properties has lagged demand, so the current supply shortage is likely to continue.
For now, many will heed forecasts of sudden house price declines and fear the uncertainty of further interest rate increases and inflationary pressures. As a result, prospective buyers and sellers may adopt a wait-and-see stance.
The property markets typically lag in the winter months, and the slowdown will be weighed down by declining consumer confidence this year. This will place a damper on house prices, with some sellers having to accept lower prices.
Why Fear is Misplaced
While many prospective sellers may concede to the fear-mongering in the news, many positive realities bode well for residential property prices. They are
- Borders have re-opened
- Government has put in place policies that will help homeowners to manage the additional expense of climbing interest rates
- Property markets are cyclical, and we’ve been here before
- Attractive properties will continue to attract interested buyers.