By Rich Harvey, CEO & Founder, propertybuyer.com.au
Watching RBA announcements about the cash rate has become a national spectator sport – particularly during this period of increased living costs and post-pandemic uncertainty.
And speculation is rife among pundits on what any shift will do to property prices. No sooner have those “Breaking news: rates announcement!” posts hit social media feeds than commenters come out and share their views.
But I’d like to put aside these monthly micro-changes for a moment and take a more academic look about what’s happened since May 2022 when the first increase occurred.
You see, we have just undergone an extreme relative shift in rates. After bottoming out at just 0.1 per cent in April 2022, rates have risen to a current level of 4.1 per cent. While some might argue that’s still historically low, the comparative change is astounding. It means rates are now in effect 41 times higher than they were just 18 months ago. Anyone who has a loan of $500,000 will have seen their annual interest obligation go from $500 to $20,500 per annum – or, put another way, from $41 per month to $1708 per month.
Many predicted this might fire the starting gun on a nationwide property price crash, and in the first few month's of 2022 things did look shaky. But a year and half on and real estate values have again shown resilience.
So, what can we learn about the susceptibility of Australian property prices from this run of rate increases?
Markets are unpredictable
Anyone who tells you they know exactly how the market will react when interest rates change is kidding themselves. It’s possible to make some reasonable, broad generalisation about buyer and seller sentiment in a changing rate environment, but those overviews don’t encompass all the nuances.
Professionals can draw on education and experience to reach conclusions but there are far more drivers influencing property prices than interest rates alone, so trying to be too precise is a foolish game.
Markets are complex
Rate rises have highlighted how diverse different locations, price points and property types are across the real estate landscape. As money became tighter, buyers in all markets needed to recalibrate their decisions, and this saw a range of outcomes depending on which section of the market you are in.
Prestige and ultra-prestige buyers were among the most resilient unsurprisingly. Most are relatively impervious to interest rate movements anyway. When they have access to plenty of funds and they see a home that fits their needs, most will aggressively chase the opportunity without fear.
Then there are downsizers. These are usually retirees with a bit of a nest egg from the sale of their home. These folks are still interest rate sensitive, but not as much as some other buyer groups because many downsizers are cashed up.
The next cohort is probably upsizers and families. This group is very sensitive to cost of living and real estate. They will need to go through the loan application process and are at risk of seeing their borrowing capacity eroded down by rate rises.
Then there are first time buyers. This collective will also find their budgets restricted by rate rises, but probably have the best long-term resilience. There are many years ahead for them where capital gains and wage increases will take the sting out of a purchase that feels pricey right now.
There are also investors. This is a financially savvy buyer collective who will be carefully considering their balance sheet – and increased interest rates will weigh those returns down in the short term.
In short, a property’s location, price point and type will help dictate how its impacted by interest rate movements.
Buffers are essential
Regardless of whether you believe markets will move up down or sideways, having buffers in place makes good financial sense.
Buffers should be applied to a range of things that will impact your ability to secure a loan and retain a property.
First up, you need to have completed a full and frank analysis of your financial resources, goals and limitations. Armed with this knowledge you can make smart decisions when looking to put in a loan application and/or make an offer on a home.
For example, make sure you can service a loan if interest rates were to rise another two per cent in quick succession. Also, have cash reserves on hand to help cover any unexpected expenses for maintenance, or if an extended period of vacancy causes the rental income to dry up.
You should even allow a buffer in what you borrow from the bank. Never overextend yourself to point of danger.
These safety nets mean you can deal with short-term shocks in order to enjoy long-term benefits.
Interest rates are unpredictable
We all grew accustomed to minimal interest rates – even when we knew these low settings were in response to a once-in-a-generation pandemic event. While deep down most people understood rates would rise at some stage, human nature had us convinced they’d stay lower for longer.
Mind you, this mindset wasn’t helped by the then RBA governor Phillip Lowe suggesting just a few months prior to the first hike that rates would remain unchanged until 2024. It goes to show even the regulator doesn’t have a crystal ball.
The simple lesson is that change itself is the only certainty.
Quality property holds its own.
Regardless of what’s happening in the market, quality property will be a superior perform over the long term.
Those who acquired good quality housing while rates were rising should feel confident about excellent capital gains over the next decade or so. In fact, hindsight proves that higher rates presented an opportunity for some to take advantage of seller desperation. History is likely to show that those purchasers who had the financial means to acquire a quality home last year probably bought at the lowest point in the price cycle.
Interest rate rises have been challenging, but the lessons from this period are valuable and evergreen. Of course, the best way to ensure you are purchasing real estate that will come through tough economic times relatively unscathed is by utilising an experienced and qualified buyers’ advocate. We are well positioned to work through current market conditions with you and explain how to secure a market-resilient home that’s right for your needs.
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