Interest Rates & The Property Market - June 2023

At its June 2023 board meeting, the RBA marked the 12th hike in its tightening cycle, bringing the cash rate to 4.10% - its highest level since April 2012.

The decision was driven by persistently high inflation (currently 7%) and tight labour markets, which have given the RBA room to raise the cash rate while maintaining credibility with their 2-3% inflation target.
Core inflation pressures and services inflation are still strong, and the tight labour market poses an ongoing risk of a wage-price spiral.

With public sector wage increases in the pipeline and an upcoming minimum wage decision, the central bank is keeping a close eye on inflation.

 

So, what does this mean for the housing market recovery?

The substantial interest rate tightening that occurred last year saw a quick rebalancing of the housing market, with prices falling from peak levels in most areas.

However, the path for home prices moving forward will be influenced by much more than the trajectory of interest rates but by various factors including housing demand and supply, migration, employment levels and consumer confidence.

Despite headwinds, such as the full impact of previous rate rises and the potential for further tightening, the housing market is showing resilience.

The strong rebound in immigration, a shortage of rental supply, and a softer flow of new listings are all working together to support home prices.

Additionally, the tight labour market has led to greater job security, and the slow increase in wage growth will help maintain housing demand.

Challenges within the construction industry, such as high construction costs and supply chain issues, are also contributing to a home shortage.

As Australia's population continues to grow, this shortage will further underpin property values.

So, although the RBA's interest rate rise may create some uncertainty, it's unlikely to slow the Australian property market upturn in the near term.

 

The Positives for the Property Market

1. Decline in household size

The Reserve Bank of Australia (RBA) has observed a 1% decline in average household size since the beginning of 2020, which has contributed to an increased demand for housing, partially offsetting the negative impact of reduced immigration during the pandemic.

2. Returning Immagrants

Net immigration surged to 320,000 in 2022, up from just 5,940 in 2021, resulting in increased demand for approximately 125,000 additional dwellings.
Immigration is expected to remain strong in 2023, further contributing to housing demand.

3. Low rental vanacy rates

Capital city rental vacancy rates are below 1%, driving an increase in rents, which may attract more investors to the property market.

4. Government support

Initiatives such as the option for first-home buyers to opt for land tax in New South Wales and other government support programs are boosting demand for property.

5. Low listings

Property listings are currently 25-30% lower than a year ago, which may contribute to a recovery in property prices.

6. Interest rates

It is likely that interest rates are at or near their peak, which may provide support for property prices.

7. Auction clearance rates

Auction clearance rates have been strong and keep rising and this generally correlate with property price trends.

The Negatives of the Property Market

 

1. Impact of variable rate hikes

The full impact of variable rate increases may not be felt for another 2-3 months, as it takes time for RBA hikes to affect actual mortgage payments.

2. Fixed-rate loan expirations

Approximately 880,000 fixed-rate loans will expire in 2023, potentially resetting mortgage rates from around 2% to 6% or 7%.

But this doesn't seem to be as big a problem as many were worried about as many borrowers have already refinanced their loans,

3. Future interest rate hikes

Although most economists believe rates are close to peaking, others predict the cash rate may rise once or twice again.

4. Rising household debt

These payments have already reached their highest level in over a decade, and further rate hikes could push them to record levels, removing roughly 5% of household cash flow in relation to income.

5. Deteriorating economic coniditions

Weaker global growth, rate hikes, and exhausted pent-up demand from the pandemic may lead to increased unemployment and further mortgage stress in Australia.

6. Reduced home buying capacity

Despite a potential halt in rate increases, the hit to home buying capacity remains, particularly for those with a 20% deposit and average full-time earnings.

What's ahead for interest rates?

The big four banks have all cast their predictions for the next few years of cash rate movements

However, the RBA doesn't really know what it's going to do - it decides each month and may continue to implement its current policy until it believes that the economy is stable enough to warrant a change.

Of course, it is possible that unforeseen events, such as changes in global economic conditions or domestic politics, may impact interest rate decisions in ways that are difficult to predict.

 

Housing market strengthens despite rate rises

Nationally, would-be buyers have been out in force despite the rate hikes, with PropTrack data revealing there was a 7% increase in potential buyers per listing in May 2023 compared to May 2022.

Furthermore, potential buyers per listing in the combined capital cities were up 15.3% year-on-year, while regional buyer numbers fell 4.8%.

PropTrack’s latest Home Price Index for May showed the national rise in prices already seen so far this year gathered pace in May, broadening and accelerating across markets.

According to the figures, national home prices rose for a fifth consecutive month in May, increasing 0.33%, bringing prices up 1.55% from the low point recorded in December last year.

 

Disclaimer: This blog post is not to be considered legal advice. If you are seeking specific legal advice we suggest that you consult a legal professional before making any significant decisions in this regard.

References:

Property Market Forecast 2023 — House Prices Predictions from Expert (propertyupdate.com.au)

Interest rates have risen again, here's what they're likely to do next - realestate.com.au

RBA's latest rate hike another hit to mortgage holders as inflation battle continues - realestate.com.au