Boom or Bust? Rate Hike Shock Rocks the Property Market
The news caused more of a flurry than the election result — a 0.5% hike in the cash rate!
The last time the RBA raised rates by 0.5% was 22 years ago.
Admittedly, I didn’t expect such a jump.
But clearly the RBA is out there to try and shock the market into submission.
Language warning of further rate rises is sending the wind up recent homebuyers.
I’m talking about those that took on whopping great mortgages over the last couple of years.
A significant proportion of first-time buyers — a generation if you like — entering the market has never experienced a rate rise. The 0.25 increase at the recent RBA meeting was the first for 11 years!
How quickly things have changed for this demographic.
I expect a few punters will start blaming the banks for lending to the unsuspecting innocents.
Their stories of impending ‘mortgage stress’ are now clickbait for the MSM.
Regardless, the serviceability buffer rate — which was increased in 2021 — gave some constraint to overextending. And notably, existing owners are well ahead in their repayments.
Needless to say, the media is now back to forecasting an impending ‘housing crash’.
Melbourne and Sydney, the biggest capitals by population, have already slowed considerably from where they were this time last year.
The preliminary clearance rates in the two capitals (a good leading indicator for changes to the median price) are in the 50%s.
As someone that works on the ground with buyers and sellers every day, I can tell you that both states are offering good opportunity for negotiation from the buying side.
However, the other states and territories that are smaller by population (Adelaide, Hobart, Perth, etc.) are faring better for the seller — as are the bigger regional centres.
Prices in these areas look cheap to anyone living in the capitals on the east coast.
With record-low vacancy rates and rising rents, the rental crisis is leaving many investors positively geared from the get-go.
I couldn’t be more clear — we’re not on the verge of a housing crash.
The timing is not yet.
There remains a significant number of drivers against it.
Speaking of which, it takes me back to a recent interview I did with the founder of SQM Research, Louis Christopher.
Louis is a wise dude.
He’s got a better record of accurately predicting annual movements in the market than any other data provider I know.
Here are his comments to me only 4–5 weeks ago:
‘The RBA may well lift rates, but it may not crash the market because of
what’s going on with inflation.
‘That’s why I like to point out real rates.
‘What is the actual interest rate adjusted for inflation?
‘This is really important.
‘If the inflation rate is at 10% and the interest rate is at 5%, your real interest rate is actually minus 5%.
‘And when you’ve got real negative interest rates, that’s effectively like
money printing. That actually still stimulates the economy.
‘A home buyer may well say, “Well, look, I can’t afford a lending rate of, say, 5%” if they’re on, say, 3% now. “I can’t afford it.”
‘Well, most likely in time, you probably will.
‘Because when you have a higher inflationary environment that’s self-sustaining. What happens is that wages go up, and other income sources go up such as rents.
‘And so, you do find, in the end, you can afford it because your own income levels are actually rising accordingly.’
The real cash rate is well below 0 — close to -4%.
We have worker shortages and low unemployment across a number of sectors.
I have mates in the construction industry that simply can’t find labourers no matter where they advertise.
It’s arguably never been easier to get a job — or for that matter, manufacture multiple streams of income via the digital landscape — than it is right now.
Speaking of the construction industry — it’s been hammered over recent years.
Rising building costs are eating into profits. We have a rental crisis, and we’re not building enough accommodation for a ‘quick fix’.
In other words — rents will continue to inflate — increasing the earnings of the land for investors. Consequently, the amount banks are willing to lend.
Add to this the ramp-up in immigration, and despite a pullback in prices in Melbourne and Sydney — and impacts from any short-term shock stemming from rising rates — the forecast for the next few years in the housing market is up, not down! (If you want to find out why I’m so confident — click here.)
However, my advice to owners that are concerned is to get their broker to review their current loan.
Lenders will be competing for the market, and there will likely be potential to save a significant amount on monthly repayments if you take the time to shop around.
Editor, The Daily Reckoning Australia