Australia’s property markets are far more complex than most realise, although prices can be directed in the short term by either confidence or fear. As such, single issues play out prominently if they’re garnering attention across media and other outlets.
At present, the subject gaining most notice is interest rates. While there are plenty of articles already devoted to the subject, I think a discussion around potential outcomes from rising interest rates is warranted.
In May, the RBA increased the cash rate to 0.35 per cent, which was a 0.25 per cent basis point rise and the first increase since November 2010. At its June meeting the RBA again increased the base rate – this time by 0.5 per cent to reach a new figure of 0.85 per cent.
While rate rises were telegraphed by the RBA, households already struggling with rising inflation, cost of living challenges and lagging wage growth are concerned about what’s to come.
Let’s dig a little deeper on how rate rises will manifest and move markets beyond the emotional drivers of fear or confidence.
The current rate setting should be entirely manageable by most households with 2.5 to 3.0 per cent rate buffers already factored in during the loan approval process. Add in the reported uptick in household savings since early 2020, plus those who paid down extra on their loans in recent years, and most families will have adequate financial cushioning to assist in the short term.
The larger concern is around future rate rises – specifically, we want to know how long, how often and how high.
Indications are we’ll see more rises this year with many expecting the RBA to remain aggressive in response to strong inflation. Another 0.5 per cent rate rise would see a $133 per month repayment increase for the average variable-loan borrower with a $500,000 debt. Given the average annual income in Australia is around $77,000, that is a sizable hit to the monthly take home pay of many.
So, I’m convinced interest rate increases will hit different sectors in different ways, but the general fallout will be less dramatic than has been posited by some commentators.
For example, mature property owners with lending in place will, in general, have more than enough buffer to ride out the rises.
On the flipside younger borrowers are faced with a dilemma. While real estate prices are softening, they’ll also need to deal with losing a larger chunk of their relatively low income to loan repayments. If they are planning to buy, they’re also facing more rigorous loan servicing calculations.
That said, there are strategies available to most. For example, don’t be surprised to see an increase in the number of aspirant property buyers deciding to live in the family home a little longer while they build their careers, and first property deposits.
In the commercial space interest rate increases play directly to the bottom line. There is rising activity in the office leasing space (at least for Prime and A-Grade floor areas), while industrial remains a hotly contested market among buyers and tenants. Some owners in both these sectors should be able to absorb and/or pass on rising costs to tenants when negotiating leases. In retail, the landscape remains more challenging.
There’s one thing uncertainty in the current market makes clear – anyone formulating important property decisions without professional assistance is at real financial risk. You need an expert’s guiding hand. Preferably one who’s watching these fast-changing markets daily, but can also assist you with long-term plans.
Please enjoy our June issue of Month In Review.
