Let’s talk interest rates, recession and the fear of buying

With interest rates rising yet again, there has been more panic in the marketplace seeing people holding back purchases for fear of an ever growing, unmanageable debt OR the hope that house prices will come down as a result and they can grab a bargain down the track.

We can confidently say that prices will not collapse on the Sunshine Coast, as interest rates or world economics are just a couple of many factors at play. All the evidence points not only to strength in the Sunshine Coast property market, but to continuing rising property prices for some years to come.

And it’s not just us. Imagine our surprise in recent discussions with some very experienced property valuers from different firms about the market outlook, their only concern is how fast prices will rise … not if they will.

So why is the market not taking off now? There is much fear around interest rates and people’s ability to afford a mortgage, but we need to keep in mind that 7% as a variable interest rate would be about ‘normal’ based on long term trends. At 5% money is cheap.

We know that the RBA is responding to the rate of inflation and are trying to bring that rate down to what they consider is a ‘comfortable’ amount for an economy to grow. They only have a couple of levers to pull, including raising the cash rate, so that’s what they’re doing, whether or not it’s the most effective way to affect inflation and whether or not that rate of 2-3% is the best target to aim for. Regardless, the constant increase of interest rates and tightening of restrictions of lending cannot last and we are seeing many other nations across the globe taking a different approach.

Noting that the inflation data is a lagging not leading indicator, global growth is slowing, and we can be confident of the likelihood of the RBA changing the direction of rates too late. We would also argue they should have left it alone a little while back and that in this new global order of things their arbitrary target band of 2-3% is based on a world that no longer exists and with a return to nationalism and sovereignty issues (like rebuilding manufacturing and other value adding of our resources), the ‘target band’ should be much higher. A story for another day perhaps.

Once the rate rise cycle comes to an end, likely this year, people will have adjusted and confidence will rise.

Another reason for a reduction in activity is the actions of APRA which we have touched on before. But more on the RBA and APRA shortly.

While the current rate of inflation can be considered a major issue for our country, an even bigger issue is the national housing crisis that continues to grow.

For those who say prices will fall, they are missing the key underlying imbalance in supply and demand. So let’s look at some key stats on supply by comparison to the powder keg that saw prices rise rapidly between 2021-22:

• Existing housing supply (listings available for you to buy) is about ⅓ less!
• New supply will be well below the 10 year trend of circa 202,000 new dwellings (a number that lead to a massive undersupply in the first place) at just 188,000.
• Rental supply is almost 60% lower (listings).

So on top of a massive undersupply, we are about to add 1.1M to 1.4M new residents over the next 3 years. Where will they live?

The ability to spend may be constricted right now, but the demand for housing has only grown and this is why house prices will not be going down.

But can people afford it? Yes.

Keep in mind 70% of all loans are held by the top 40% of income earners. The value of all mortgages in Australia versus the value of all property puts the national loan to value ratio at about 25%. That’s significant equity.

Note the national default rate on mortgages sits around the 15 year trend at just over 0.5% of all mortgages. Yes there are many loans coming off of fixed rates, but they were provided those loans on the basis they could afford an interest rate 3% higher than what they were paying.

We have rising wages, rising dividends from companies and while we have inflation, it’s always a mistake to try and ‘math’ how people can’t afford property. That said, it’s also about understanding that the levels of home ownership will drop. We may have to accept more Aussies will rent and never own a home.

The new Australian dream is already moving away from a home with a yard and a ‘Hills Hoist’ to a very different and smaller version. Unfortunately, it’s likely that within 10 years the new Australian dream will simply be the security of a place to live, such is the housing crisis we’re in.

What is slowing market momentum (but not the prices, especially in the ‘affordable’ category – thus making them less affordable) at the moment is confidence and access to credit, and this is particularly true for investors.

While the RBA is responsible for setting the cash rate which impacts the interest rate people pay on their loans, APRA exists to regulate banks and thereby if and how much money you can borrow.

APRA only have a few levers to pull such as:

• How much deposit is required
• Percentage of investment lending as a portion of all loans
• How many interest only loans over principle and interest loans
• Rates for investors vs owner occupiers
• How much a bank can lend as a percentage of their deposit books
• The rate a person is assessed for accessibility to credit (assessment/floor rate)

Such actions by APRA have reduced the rate of investment into new housing products significantly over the last 8 years, which has greatly contributed to the undersupply. Now, the most needed intervention, being residential property investors adding new rental stock to supply, is hampered by many things, one being the assessment rate. If your loan(s) are being assessed at a rate that is 3% higher than what you have to pay, and likely 1-2% higher than interest rate peaks, then each time you try to purchase a property the ability to service gets further away. It’s irrelevant how much equity you have, and that you can afford the property, you just don’t get the loan and tenants miss out.

The assessment rate is a major brake on supply, but thankfully APRA is signaling they are ready to move that rate down. Likely too little too late for the massive increase in supply we need. They also need to look at other constraints they have applied too.

That said, once either or both interest rates are lowered and/or assessment rates are lowered the release of pent up demand will be like a dam bursting. The activity will increase … and the prices will follow.  It is highly unlikely we will suffer extreme enough economic conditions to cause otherwise. People need somewhere to live and we don’t have enough housing.

Those who understand the metrics can see through the short term cost of funds and the mass hysteria to make an educated assessment of risk and opportunity and are buying now. 

If you’d like to understand the opportunities available to you to leverage the current market opportunities then reach out to our team for a free property strategy session to see you get ahead of the pack.