By Rich Harvey, CEO & Founder, propertybuyer.com.au
There’s a lot of noise about interest rates at the moment after the latest inflation measure came in a little hotter than expected, sparking uncertainty and speculation.
We were meant to be staring down the barrel of a rate cut by now, with economists at the start of the year tipping the first decrease to the Reserve Bank’s official cash rate between the middle and end of 2024. Those same economists now say that’s virtually impossible.
And a few are even worried about a rate hike in August, after six months of the cash rate being on hold.
What’s going on? Are rates really about to head up again? Should you panic?
The answers to those first two questions are a little tricky, but I’ll walk you through it. But thankfully, on the third point, I can be absolutely succinct, clear and definitive.
No, you don’t need to panic. On the contrary. You should be excited by the opportunity that’s suddenly presented itself.
Where we’ve come from
Back in May 2022, when the RBA board met and made the decision to increase interest rates from an historic low of 0.1 per cent, the impact on housing markets was immediate.
After a period of extremely strong growth, property prices stagnated and then began to fall. Vendors who had been sitting on their hands, waiting for the right time to list, and suddenly panicked that they’d now struggle to find a buyer, so a fair number of them rushed to market. At the same time, nervous would-be buyers wondered what the impact of higher mortgage servicing costs would look like, and also didn’t want to purchase if prices were about to drop.
A rapid collapse in buyer demand, coupled with an uptick in supply, put downward pressure on prices and they kept falling for several months. In all, it wasn’t catastrophic - about seven per cent or so at a national level.
Rates kept surging, with more than a dozen increases following, pushing up the cost of home loan repayments and taking a big stick to borrowing capacities.
Although, it should be said, rates were still rising when the market bottomed out and leapt upwards once again from the start of 2023. Intense buyer demand and constrained supply has sparked a long period of good growth.
Rates have been on hold for eight months now, which has brought stability to markets and lowered anxiety levels. Economists and pundits were of the view that the RBA would make a cut to rates in the backend of 2024. Those predictions have evaporated.
The RBA’s thinking
The latest monthly measure of CPI - the consumer price index, or inflation - came in higher than anticipated at four per cent in May.
To put that number into perspective, the RBA is trying to get inflation back to within its target range of two per cent to three per cent. So, there’s still a way to go until the RBA board is confident its war on CPI has been won.
The RBA board has been blunt in the past, saying that their number one mission is bringing inflation back under control. That has some pundits fearing a potential increase to the cash rate when the board meets in August. A rate hike would undoubtedly come as a shock to many Aussies
But over recent months, there have also been a few signs to indicate the RBA won’t rush into a major decision, like hiking rates again, without being absolutely sure it needs to. So, a rate hike in August isn’t a certainty. The RBA might wait for further measures of economic health before deciding what to do.
Still, there’s bound to be some uncertainty in the market. And herein lies the opportunity for savvy investors.
What should you do?
When it comes to what happens next, there are a few possibilities.One, the RBA hikes interest rates in August, or perhaps the following month. That would probably take some steam out of the market and see price growth slow or bottom out. Some buyers might delay making any purchasing decisions until they see what happens next. It might dissuade some would-be vendors from listing, reducing supply. It might also have the opposite effect, where panic sees a rush of sellers coming to market. The supply and demand dynamics we’ve seen for the past 18 months could be altered.
Two, the RBA does nothing and keeps rates on hold indefinitely, either because they’re waiting to see if the inflation measure is a temporary trend or because other measures indicate they’re still on track to get it under control.
No-one likes uncertainty, especially when it surrounds big and costly decisions like buying a home or investing in property. But take comfort in the few things that are clear right now.
Inflation is still broadly heading in the right direction - down. It’s doing so slower than everyone would like, but the trend is still there. Impacts elsewhere in the economy, like the persistent cost-of-living crunch, reduced household spending and government measures, continue to contribute to a gradual lowering of CPI.
While rate cuts might’ve been delayed, economists still believe a rate reduction is likely, although not until the beginning of next year when things have calmed down. But all are of the view that rates will drop, and continue dropping, soon.
The beginning of a period of interest rate reductions will be significant. It will make borrowing money a lot cheaper. It will take pressure of those households with mortgages. It will improve borrowing power for those keen to enter the market. It will give a boost to first homebuyers, who’ll also benefit from generous government grants and schemes, like the Help to Buy initiative.
In all, when rates begin to drop, housing markets are sure to grow again, so take this pause as an opportunity ready yourself to buy.
If home prices slip over coming months, don’t panic along with everyone else. Like Warren Buffet famously said: “Be fearful when others are greedy and be greedy when others are fearful.” If things plateau, take that as a sign that things aren’t quite as dire as some media headlines will make out and prepare to act with confidence.
From this point onwards, you should:
- Be clear about your goals. What are you hoping to achieve via investing and how can you get there? What areas are you interested in? What type of dwelling suits your needs, whether you want a home or an investment?
- Engage an experienced and qualified buyer’s agent to help you devise a plan. You want to be ready to act as quickly as possible when the time comes.
- Get your finances in order. Enlist the help of an expert who can assess your situation, help you understand your borrowing capacity, show you what the picture looks like when rates drop, and get your ducks in a row with a pre-approval.
- Monitor the market. Seek out data that shows you what prices, buyer demand, listing volumes, time on market, rent prices and vacancy rates are doing - not just at a national level, and not even just at a capital city level, but within the pockets you’re keen to target.
- Keep abreast of the economy. It’s often not that sexy, but it’s interesting to keep your finger on the nation’s fiscal pulse. Read RBA board meeting minutes, check the regular updates provided by top notch economists at the Big Four banks, flick to the business pages of respected newspapers or websites. Arm yourself with knowledge.
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