For the third month in a row, rates have been left unchanged at 4.10% which while not unexpected, is a massive relief for those finding it tough. Interestingly, a well-respected economist mentioned the last three rate rises were totally unnecessary and the inflation figure would have been where it is now without them. During COVID, banks were much more forgiving on deferrals for home owners and businesses. At the peak, $250 billion in loans had been put on hold. This time around the same gratitude will not be extended. The good news is that the inevitable mortgage cliff that so many predicted for those coming from a fixed mortgage in 2021 has so far not been nearly as severe as first thought.
Undeniably there will be much financial pain with many borrowers experiencing up to 60% increases on their home loans which on average is an extra $2,000 a month. Most households will seriously need to save, and some may well decide to sell to make ends meet. Household spending is down 5.4% over the past 12 months so the increased interest rates are having the desired effect of curbing spending. The true effects of the transition to variable rates will be witnessed over the next 8 months. Interest rates are predicted to fall in 2024. Property prices retracted in Melbourne 8.5% for the 12 months to January 2023 but then rose slowly to March and have witnessed gains throughout the year and will continue to do so until the end of 2023. Supply and demand are driving the upswing with listings down on this time last year. Stock levels are now increasing with a 9% boost over August up from a 5% decrease in July. Auction clearance rates are hovering at a respectable 70%, up 10% from this time last year.
Low unemployment and wage growth are naturally helping confidence in the real estate market. Interest rates should plateau until the end of the year, but bear in mind one or two more rate hikes are possible should inflation not subside. I agree with the Reserve Bank Governor being strong on productivity as if this does not improve, high inflation will no doubt persist.
Hopefully the unnecessary investment disincentive of rent freezes for two years and rental caps of one percent per annum will be revisited. I do however feel that it seems fair to introduce a maximum rental increase per annum. Rental vacancy rates are 2.2% in the Melbourne Metropolitan area and 2.3% in regional Victoria. A more balanced level is 5%. From 2022-2024 approximately 700,000 migrants will be settling in Australia and no doubt will be seeking rental accommodation prior to looking to buy. This will put added pressure on an already depleted rental supply and low property listings for sale. Migration is healthy to the fabric of Australia and the economy, but it requires diligent research to maintain a fine balance.
Overall, I see the months ahead as positive for the property market. Metropolitan prices will continue to increase if only marginally, Regional Victoria will surge again after a nap, current auction clearance rates will hold, supply is on the increase, migration is plentiful, rental demand is strong and commercial property continues to prove to be a sensible investment. All in all, well-located quality property should continue to grow and in many cases double in value every 10-12 years. No guarantees of course but there is no question in my mind that the stars are aligned to consider a property purchase.
Michael Ramsay
Principal
The Advocates