Buckle up, cash in or relax?

With the most recent annual inflation measure lifting to 4.4%, questions and speculation are surrounding what the RBA’s next move will be with the cash rate.

And how will that affect housing values?

So far, housing values have continued to rise even as the cost of debt has risen, with the overarching reason being a lack of supply compared to demand. Some contributing reasons are that tight labour market conditions and an accumulation of savings through the pandemic have cushioned mortgage serviceability, mitigating a need to sell as rates have increased. Also, the construction sector still struggles to deliver a large backlog of dwellings, and strong population growth has increased demand for housing, both for purchase and rent.

Despite this, raising interest rates again can push some mortgage holders over the edge of affordability, forcing them to sell. Moreover, potential buyers will qualify for smaller loans, reducing their purchasing power and ability to afford higher-priced properties, potentially decreasing demand. With reduced demand, sellers might need to lower asking prices to attract buyers, leading to stagnation or a decrease in property values. In addition, some sellers may choose to delay selling, hoping for better market conditions in the future. This can create a temporary reduction in supply but may lead to an eventual glut if many choose to sell later.

Some other implications of a rate rise include:

• Rental Market Pressure - If fewer people can afford to buy, the demand for rental properties might increase, potentially driving up rental prices. This could benefit investors but place additional strain on renters.

• Development and New Construction - Higher interest rates can increase the cost of financing for developers, potentially leading to delays or cancellations of new projects. This could exacerbate supply issues in the long term, especially in a city like Sydney where housing supply is already a challenge.

• Consumer Spending - Increased mortgage repayments mean less disposable income for households, which can reduce consumer spending and slow economic growth. This has indirect effects on the property market as well, impacting buyer confidence and investment.

• Inflation Control - While raising interest rates is a tool to control inflation, if it leads to a significant slowdown in the property market, it could affect broader economic stability, which is closely tied to real estate in Australia.

In summary, another interest rate rise is likely to dampen demand in the Australian real estate market, particularly in Sydney, where property prices are high. This could lead to decreased property values, increased supply from distressed sellers, and a shift in buyer demographics. However, the luxury market might be more resilient, and rental markets could see increased demand. The broader economic impact includes reduced consumer spending and potential slowdowns in new property developments.