Rate increases. Price increases.

Rate increases. Property price increases.
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Only a few short weeks ago, the mainstream media’s long standing tradition of either reporting boom or bust in Australia’s residential property landscape was holding firm - reporting on massive price drops by mid-2023. Seemed fair. In under a year, mortgage interest rates have increased from historical lows to levels not seen by an entire generation of property buyers. In a lot of cases, almost tripling the monthly payment for many who were already on, or have transitioned to variable rates.

The aim is to create pain for households. A scenario where borrowing capacity is not only reduced for new borrowers, but those with mortgages are forced to spend less on discretionary items and more on their mortgage, thereby returning all that excess COVID cash to the source and, in turn, reducing the rate of inflation.

The usual and blunt effect on property markets is that with a reduction in borrowing capacity comes a sharp reduction in both the servicing abiliity and appetite for new and existing mortgages. This theoretically reduces the demand for property and thereby reduces the price. 

However, a funny thing was happening whilst this doom and gloom reporting was going on. We were seeing something very different on the ground...we were actually seeing the first shoots of price rises (and reported this back in March: Is Property Still Cooling?) A few thought we were dreaming and some buyer interactions told us they wanted to wait until mid-year when the market had cooled further. While we cautioned against this, media hype was winning again. Fast forward a few weeks and all of a sudden the data is indicating that we were right – prices are once again rising in Sydney and they are gathering steam.

It appears to be somewhat of an anomaly at present as to why, in the last 2-3 months, property prices across Sydney (and other places in Australia) have actually increased and not fallen. A little bit of a look at some of the factors may provide some clues as. In short, supply and demand still holds firm regardless of the cost of credit, Let’s have a look at the current tug of war and what is winning.
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Low number of properties for sale (supply)

In the Sutherland Shire (where we do the vast majority of our buying), the total number of properties for sale at the time of writing is 553 – an incredibly and historically low number relative to the long running average. Buyer numbers are still extremely strong in the Sutherland Shire as it is a very desirable part of Sydney, with the vast majority of our clients being from out of area looking for great value and lifestyle.

For every property on sale here currently, there are anywhere from 5-25 buyers, often more in some cases. What this also means is that every time a property sells, the majority of those buyers are missing out, creating a compounding effect in both sentiment and urgency towards the next property that fits their brief, and for which they have to compete. This drives prices upwards, assuming they can still afford the mortgage.

Immigration (demand)

Post-COVID immigration numbers (both new and returnees) are up and most gravitate towards the capital cities, especially Sydney and Melbourne. All these people have to find somewhere to live which puts pressure on rents for those who choose to do so, and pressure on property prices for those who choose to buy. There aren’t enough additional properties to buy as the number of people increases because…
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Building companies are collapsing and the cost of building has increased (supply)

To house current Sydney families which are expanding, and those coming to Australia to live, more supply in the form of new stock is also needed. Given supply chain issues and the raw cost of material increases as a result of COVID and other global events, the overall cost of building has increased exponentially. As a result, many building companies have been collapsing in recent times as they buckle under the weight of fixed price contracts and the effect of interest rate increases as well. Of course, this further adds to housing supply problems and the effect is compounded.
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Rents are increasing (demand)

Also as a result of immigration and the factors above, rents have increased in percentage terms faster than ever before. As buyer’s agents, we have seen an increase of first home buyers (FHBs) enquiry for purchasing assistance lately. Many are reporting 50-60% increases in rents and have simply decided that at those rates, it is better to buy a home rather than rent regardless of the current cost of credit. This adds to the weight of demand on the FHB market and supports pricing to allow people to sell and move up a bracket for a growing family who may have been a FHB only a few years ago.
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The solution
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Unfortunately, with inflation rates still high and property prices increasing, in addition to other large economies increasing their interest rates (which affects the import/export market due to currency pairings), it is hard to see how the RBA is going to cease or reduce the cash rate in Australia any time soon. At this stage, it looks like at least two more rate rises are possible, if not probable, with even more on the horizon. Anyone in Sydney will tell you that the restaurants are still full, the coffee lines are long and the cost of discretionary service spend such as gardening and house cleaning is still high. Until people hurt badly enough to stop spending on discretionary items and lower their appetite for mortgages, the RBA appears to have some easy choices.

In the short term, we are still competing on behalf of our clients for what property is available and without compromising our standards. If you really do need to buy and are having trouble, engage a professional who will work exclusively for you whilst you’re at work and enjoying your weekend. Stock is low, but understanding the market conditions and what something is worth (and what to walk away from) is still the key to achieving your property goals.

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