There has been a lot of negativity in the media recently surrounding the property market.
‘Doom and gloom’ sells a lot more ad space than ‘reason and balance.’
I’d even call it fear mongering, the current conversation around interest rate hikes.
I attended an excellent presentation on Tuesday by Domain’s Chief of Research & Economics, Dr Nicola Powell.
She told us about a one-hour interview she did last week for a large news network regarding the outlook for property prices and the effect of interest rate rises.
She said she was very measured and pragmatic. She gave them the facts and the data. She was impartial.
The media outlet decided not to use her interview, not even one 10-second snippet, because it didn’t follow their (fear mongering) narrative – that we are all doomed, will soon be underwater on our home loans and house prices are about to fall off a cliff.
Sensationalism aside, many people are genuinely concerned about interest rate rises.
They say that the most sensitive nerve in the human body is the hip pocket.
Rate hikes hurt. Especially for a cohort of Australians who have never once seen an interest rate rise and think that fixed and variable mortgage rates of 2 – 3% are normal.
Higher interest rates will be a shock and a reality check for many. It could be the straw that breaks the camel’s back for some. But not many.
But let’s counter some of the negativity with a few positives that aren’t receiving much air time in the mainstream media.
Here are a few takeaways from Dr Nicola Powell’s presentation…
Firstly, we have a buffer for this exact scenario.
Our lending criteria, one of the strictest in the world and recently made stricter thanks to the Royal Commission, currently factors in a 3% interest rate buffer when determining serviceability.
So even if we see rates rise by 2 – 3% over the next year, most people should still be able to service their mortgage, given the same income.
Furthermore, Australians squirreled away $240billion in savings during COVID and are well ahead on their mortgage repayments.
And then prices went up by an average of 20% across pretty much every market in Australia in just 12 months. This is unprecedented.
Even if prices come off 10-15% most people will still be well ahead in terms of their equity compared to just 18 months ago.
Secondly, unemployment is nearing all time lows and there is increasing pressure on wages, meaning that we should finally see some wage growth in the coming years.
Thirdly, the rental market has seen an incredible recovery and rents are rising. Higher rents make purchasing more attractive.
And finally, higher construction costs will make housing more expensive over time.
It’s no wonder renovated homes are selling for such large premiums, when the cost of a renovation is somewhere between 30 and 100% more today than three years ago, depending on who you talk to.
There is no question that interest rates are a huge driver of property prices. The correlation is strong and undeniable.
All other things being equal, when interest rates go up, house prices go down.
But interest rates are not the only driver of property prices. And all other things are not equal. There are always competing market forces.
Restricted housing supply, employment and wage growth, higher construction costs, a return to positive net immigration, higher savings, rental (un)affordability… these are all tailwinds to the property market that may act to counter the big headwind of interest rate rises.
So it’s not all bad… Unless you watch the news.
From our perspective, the market is holding up very well and we continue to list and sell beautiful homes in Stonnington.
Last week we had three sales, all of which greatly exceeded price expectations, and our numbers at open inspections have been strong.
While many buyers and sellers may choose to hold back in the coming months, we like to focus on those who are ready to act.
If that is you, please reach out so we can help.