The property market is holding currently but I do see an increasing divide between the wealthy and the not so affluent buyer. Tuesday’s rate increase will bite hard and could be the one that tests peoples’ resilience. It will certainly rein in many first home buyers who contemplated relief ahead and investors who thought they were in a reasonable position to secure a second property. With inflation higher than expected together with a 5.75% minimum wage increase there was good reason for nervous investors to forecast another rate hike last week erasing $40Billion from the ASX200.
The market peaked in February last year but from here didn’t collapse to the tune of 20% as many predicted, instead it bottomed in December and has since clawed its way back against extraordinary odds. Melbourne’s median price has retreated approximately 8% from the high and is gaining on average .5% monthly. Regional areas have also shown stamina and have risen a similar amount last month after modest rises in March and April. Interestingly only 15% of the net migration intake are drawn to reside in the regional areas. Borrowing capacity has been reduced by 30% and couples have been priced out of nearly 60 suburbs. Buyers are now forced to purchase further out of town paying higher fuel costs and vehicle maintenance.
Auction clearance rates are hovering at 70% and have reached 80% in several suburbs closer to the CBD. Supply is incredibly low however with listings 15% below this time last year and 24% below the 5-year average. The number of days on market are increasing and hopefully most homes will find a suitable buyer. Apartments have also lost ground but are stabilising and are still a favourite with investors. This is not an environment to be too bold and overly ambitious as a vendor. Listen to the market and absorb relevant data. With the cost-of-living soaring, up 15% for milk and power in 12 months, buyers’ pockets are shallow. Of course, for the well-heeled, interest rate rises will be insignificant or a blessing to their bank deposits. They will continue to gain headlines of new records set but they are a minority.
The RBA head has conveyed that the ideal scenario was for the minimum wage rise not to exceed 4% on Friday, for future inflation figures to plummet to 2.5% and productivity to rise to 1% (flat for the past 3 years). We are so far from this scenario that there will be more pain for borrowers to come. I accept that a 7% interest rate is more sustainable than a similar inflation figure but the process in which this has been handled has been disappointing. One thing for certain is …. property prices will ebb and flow, but inevitably increase.
Michael Ramsay
Principal
The Advocates