The impact of increasing interest rates on property prices

Discussion in 'Property Market Economics' started by Redom, 28th Apr, 2022.

Join Australia's most dynamic and respected property investment community
  1. strayingknight

    strayingknight Well-Known Member

    Joined:
    13th Jan, 2022
    Posts:
    100
    Location:
    Sydney
    I think it's mostly to do with valuations. Current Sydney prices (melbourne maybe to a lesser extent) won't be justified with a much higher rate given the income level which puts a big cap on affordability.

    Other markets (like Perth) will still be impacted but at a much lesser extent for the same reasons.

    Plus there are other positives going for Perth - particularly the mining sector.
     
    Dmash, Nando Lee and MTR like this.
  2. eup

    eup Active Member

    Joined:
    27th Mar, 2022
    Posts:
    38
    Location:
    Sydney
    A few of my own personal notes on Demand & Supply from my POV after the RBA's clarity provided today. Mostly focused on SYD market and taking a perspective of what I think might unfold 6 months from now.

    Demand
    • Most buyers reliant on borrowing capacity, will see their capacity fall, likely to be hit by 10-20% lower borrowing capacities in a matter of months if the ramp up in rates over the coming months is to be believed. (My view is we'll have 1%+ cash rate by August). I'm in this camp, and my current thought process is: I'm not going to immediately compromise on location / asset quality, but rather wait to see if the same assets that I'd be able to buy today, come down in price (i.e. like-for-like buyers meet like-for-like assets / sellers).
    • Smarter investors, active flippers etc (i.e. the PC crowd) will wait it out whilst momentum/sentiment is bearish (or be very selective in what they buy, effectively picking up stuff if they can actually get the 10-15% discount to what they consider fair value). A few already mentioned they see better buying 12-18months away.
    • Mum and Dad investors: I see many will be influenced by the chatter around the BBQ, i.e. scared away by the headline grabbing statements about it being a bad time to buy / banks forecasting lower prices / higher interest rates - likely to see reduced demand from this segment.
    • Downsizers should be relatively unimpacted, they are cashed up and will stay pay a premium for the right asset. Will probably benefit from less competition from other groups.
    • Business owners also ok, booming economic conditions
    • Overall I think the demand side points towards 10-15% decrease in prices as some groups wait on the sidelines, whilst others have decreased budgets but will unlikely compromise on location/asset type given the current negative sentiment surrounding future price direction. The A+ assets (defined differently by suburb of course) though should still trade reasonably well, as there is always going to be buyers for those, who are less interest rate sensitive, and will still pay a premium for an asset that may be a "15+ year / forever home".
    Supply:
    • Biggest argument is that when prices fall, the quality stock doesn't come to market, and that being withheld will hold prices up pretty well. It's a bit unclear how this will play out, but I can believe this argument for the absolute top percentile of stock. With that said, people sell for a whole bunch of reasons, and not everyone is like your property obsessed PC forum user, they won't all care if they don't get the ATH price for their property, as most still will trade at a huge profit, even after a 10-15% drawdown from ATH value.
    • I don't see forced sales materially impacting the market at all. Households are assessed at higher rates, and have relatively healthy balance sheets. Income rises should be above average to help offset interest rate rises.
    • Overall, the supply situation may get worse as prices fall. This may have a limiting effect on the falls we see. But the properties that do come to market, will not be expecting ATH prices from top of the market, so will probably accept the demand-side pricing (will take months to filter through to this point, but it will come).
     
    craigc, Firefly99, ART and 5 others like this.
  3. MTR

    MTR Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    27,784
    Location:
    My World

    Median Perth $560k
    Med Syd $1.4M
    Med Melb $1M
     
    Northy85 and 2FAST4U like this.
  4. ozhiker

    ozhiker Well-Known Member

    Joined:
    19th Apr, 2022
    Posts:
    141
    Location:
    Strathfield
    Very well said!
     
    BigL likes this.
  5. Onlinedave

    Onlinedave Well-Known Member

    Joined:
    8th Mar, 2019
    Posts:
    729
    Location:
    Asia
    I’d just have to disagree with the strong economic conditions point.

    if rates rise materially, we have an inflation problem, and households all start feeling poorer, the economy won’t be strong for long.
     
    Citycat88, gman65 and ozhiker like this.
  6. sash

    sash Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    15,604
    Location:
    Sydney
    @vhirlpool

    If you buy a house newish house in Outer Perth in a new suburbs...it will cost you $450k. To rent it would cost you 520pw. That is 27k in rent.

    Now if you bought it with a 50k deposit plus stamps/legals. You have a mortgage of 400k.

    At current rates you will pay about 18k in P&I repayment give or take at a rate of 2.5%. Even if it rose to say 4.5%....you would be up for 26k. So same as renting maybe even less due to rents rising quickly.

    In Sydney similar house in say Oran Park would cost 950k. Rent would be 30k per annum. If you bought it would cost about 43k per annum at 2.5% PI ...if it went up to 4.5% it wold cost about 65k. :eek: So rent is still substantially less than buying current 13k cheaper...if rates go to 4.5% it would be almost 35k cheaper.

    Remember wages in Perth is almost identifical to Sydney. Dems how it rolls...:p
     
    Last edited: 3rd May, 2022
    spoon, Firefly99, No_Limits and 10 others like this.
  7. Stugots

    Stugots Well-Known Member

    Joined:
    7th Aug, 2021
    Posts:
    102
    Location:
    Brisbane
    Did you look at the graph? There were five occasions where Property went down in Australia.
     
  8. skater

    skater Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    10,222
    Location:
    Sydney? Gold Coast?
    I don't think there's a single person who has said that property only ever goes up. It goes up, it goes down, it goes sideways.
     
  9. Squirrell

    Squirrell Well-Known Member

    Joined:
    26th Sep, 2020
    Posts:
    999
    Location:
    Australia
    Says it all.
     
    MTR and BigL like this.
  10. icic

    icic Well-Known Member

    Joined:
    16th Dec, 2016
    Posts:
    1,109
    Location:
    sydney
    Yes, despite the recent price rise for Perth, it's still at its price in 2010 without taking inflation into account! This is nuts! Get in quick before Perth completely wakes up.
     
    Last edited: 4th May, 2022
    Squirrell and BigL like this.
  11. BigL

    BigL Active Member

    Joined:
    25th Jun, 2015
    Posts:
    41
    Location:
    Victoria
    Given how much debt there is, I don't see how small rate rises don't have their desired effect in curtailing inflation. Just 1% should have a strong impact on spending, but a minimal impact on property. There are some transitory factors at play as well, which should ease up over the next 12-24 months.

    Oil needs to get to a sustainable level, China needs to stop its covid zero policy. Chip production increases. Supply issues hopefully start easing, now that money isn't free anymore.
     
  12. Redom

    Redom Mortgage Broker Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    4,607
    Location:
    Sydney (Australia Wide)
    Yes true.

    I suspect we have a little more information from yesterday. Theres a couple rate rises almost surely backed in June and July. That takes us to around 0.85-1% depending on their size.

    From here, at the August meeting, the RBA will likely be staring down this data set making decisions:
    • Unemployment the strongest its been in 50 years. All measures of employment showing the same story, participation, etc. We already have this, so its not really going to change given the momentum in the labour market.
    • Wage growth at its highest level in years (decades). A function of the above.
    • Inflation levels potentially overshooting the 6% figure they've provided. The next data set strips out an 0.8 per cent QTR reading and adds in current QTR inflation. If there's another 2.1% reading, then inflation may be 6.4-6.6% again. This would make their current forecasts OFF and trigger further rate rises in their trajectory to get it back down.
    • GDP growth strong.
    That may be the above data set they'll have in the August meeting after increasing the cash rate to 1%.

    Its not a data set to say 'slow down'. Its one that says 'stay the course (maybe hit the accelerator given inflation keeps overshooting)'. If they do, I suspect they'll misjudge the reality of what is actually happening on the ground, the sensitivity that households have to rate rises, and cause a reversal in employment and growth.

    High level, I can see rates shooting up and then coming straight back down if they're not very careful. I don't see how the economy will handle a 2.5% cash rate in 18 months. The drain on liquidity is too large for Aussie debt balances to absorb this, and that will pressure the economy, etc. Overall this economic nirvana moment were in is in for a real shake up soon. They have data on this, but look on aggregate to make decisions. I don't think households will accept drawing down on their buffers (behavioural) for the economic circumstances around them. They will pull back spending/etc, rather than dip into savings balances. Those that don't have buffers will need to do it and be forced.

    Very tricky to balance.

    For property investors, this could be a wonderful opportunity. Volatility in house prices can lead to opportunities arising from well timed decision making. Concepts like 'buying yesterday is the right time', 'its always a great time to buy real estate', doesn't take into account the current monetary realities that Australia faces in the next 12 months.
     
    Last edited: 4th May, 2022
    craigc, SuperOlaf, Observer and 7 others like this.
  13. TheSackedWiggle

    TheSackedWiggle Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    1,826
    Location:
    canberra
    I think inflation being transitory is rather wishful, It may pull back temporarily only to be snapped back later.
    Deglobalization will be the new black in the upcoming decade and sustained high inflation print will be the natural outcome of that
     
    Dmash and gman65 like this.
  14. John_BridgeToBricks

    John_BridgeToBricks Buyer's Agent Business Member

    Joined:
    25th May, 2018
    Posts:
    2,407
    Location:
    Sydney
    I don't know anyone who thinks this, or has stated that on this forum.
     
  15. Sackie

    Sackie Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    25,034
    Location:
    Vaucluse, Sydney.
    Wrong. The person you quoted stated it :p
     
  16. gman65

    gman65 Well-Known Member

    Joined:
    23rd Jun, 2015
    Posts:
    1,802
    Location:
    Brisbane
    RBA rates aren't the only things at play with mortgage rates.. there is still the offshore funding which will impact our market. RBA says they want to shrink their balance sheet, so lenders will have to increasingly go offshore for their funds also.

    If the US Central Bank raises rates strongly, our banks cost of funding will go up. Our banks will also want to maintain strong profitability even with less mortgages being written moving forward.

    So all in all, I'm thinking there may be some extra rises coming later on top of any "official" rates, as per 2018/19. Historically the RBA has taken this into account when considering rate changes, but time will tell.

    It's going to be a tight balancing act, because if the international rate differential gets too out of whack our dollar will take a tumble. This will be good for our exporters, but not very good for anybody importing goods (where costs are already very high as everybody knows). Inflation would then rise.

    Some "light" reading from the RBA regarding offshore funding of our banks:

    The Nature of Australian Banks' Offshore Funding | Bulletin – December Quarter 2019
     
    Dmash, ozhiker, ParraEels and 6 others like this.
  17. MTR

    MTR Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    27,784
    Location:
    My World

    Would say many suburbs in Perth still at peak of 2007

    Perth started rising in 2021 with some suburbs ie inner city growing at double digit. Investors in East coast are waking up to this….. with many jumping into various markets. I know this cos agents are bombarded
     
  18. ozhiker

    ozhiker Well-Known Member

    Joined:
    19th Apr, 2022
    Posts:
    141
    Location:
    Strathfield
    I was asking this In another thread as to repercussions of rba staying way below US rates….

    looks like fed might increase by 0.50 tonight?
     
    Dmash and Tofubiscuit like this.
  19. Tofubiscuit

    Tofubiscuit Well-Known Member

    Joined:
    1st Nov, 2018
    Posts:
    1,479
    Location:
    Sydney
    Apparently, four 0.50% increases in a row per Mr Market
     
    Dmash likes this.
  20. euro73

    euro73 Well-Known Member Business Member

    Joined:
    18th Jun, 2015
    Posts:
    6,125
    Location:
    The beautiful Hills District, Sydney Australia
    or cash flow