Another month, another rate rise!

Considering the RBA had forecast no increases to the cash rate until 2024, it is hard to believe it has risen 400 basis points in just over 12 months.

But what does this mean for borrowers and the real estate market?

In April last year the cash rate - and therefore interest rates - was at an all-time low. The property market had experienced the sharpest increase in house prices on record and mortgage brokers were run off their feet responding to potential borrowers who wanted to enter the market before it got away from them. Adding fuel to the frenzy was comfort in the RBA’s reassurance of a stable rate until 2024.

In a matter of weeks, the bombshell no one saw coming was dropped. The central bank announced a 25 basis points increase to the cash rate at its May meeting. Unbeknown to most, this was the first of what has now been 12 increases in 14 months and the warning that there may be more to come.

With the market on a high in 2021, mortgagors stretched their borrowing to capacity to keep up with the surging prices. To safeguard borrowers from fluctuations in their financial position, lenders had to factor in a 3% buffer when assessing the value of their loan. That 3% has now been fully absorbed and surpassed with rates 4% higher that when many took out their loans.

For some mortgage holders these increases will be manageable and they will ride the tide until it changes course. But for many, these changes will prove to be unsustainable and they will look for alternative ways to service their loans.

The first plan of action will be cutting spending, particularly on discretionary items. When there is no more fat to cut, they will dip into savings to avoid defaulting on their repayments. The viability of these strategies will determine the life of the loan and whether refinancing or liquidation is necessary.

Although many homeowners are hurting as a result of the RBA’s policies, they insist the economy, inflation, unemployment etc. gives them no choice. They also acknowledge that house prices are rising again, which is contrary to what they hoped for and works contrarily to customary responses to tighter borrowing parameters.

But why is this?

The market is currently experiencing a shortage of properties available for purchase. There are around 25% less properties for sale compared to the usual for this time of the year and this, in combination with the strong buyer demand, is pushing up prices. In an environment where interest rates have risen 12 times in 14 months it demonstrates the effect that the supply/demand ratio has on prices.

Spring traditionally experiences an uptick in properties hitting the market. We expect this to be the same this year and with the economic situation deteriorating for many households there will also be an increase in property owners feeling compelled or inclined to sell. This will undoubtedly lead to a softening of home values; the extent to which is anyone’s guess.

On the ground

Auctions continue to be well attended and active. Buyers keep telling us “there is nothing out there to buy”. My auction last week attracted 8 registered bidders, 5 of whom chose to bid. 43 bids later it sold for $80,000 over reserve.

As we know, spring is often regarded as the peak selling season but remember that your competition when selling your property is other sellers. Every day can bring another property on the market so why wait? If you are thinking of selling, my strong recommendation would be to prepare now.