Have we reached the bottom yet?

The RBA increased the cash rate again this week, making it the most rapid and biggest rate tightening cycle on record.

But there are many moving parts in this real estate cycle which has left us guessing when it will bottom out.

We have been well informed by the RBA that the nine interest rate rises since May 2022 have been implemented to counter escalating inflation. Yesterday’s announcement came as no surprise following the February report where Governor Lowe made it clear to expect at least one other increase, if not more.

Increasing interest rates usually correspond with lower property prices but this cycle has somewhat bucked the trend. Although we saw a rapid weakening of prices following the first unexpected rate increase last year, the rate of decline slowed in the third quarter of 2022 even though financial institutions passed on the new rates to their customers.

Neither lenders nor borrowers want to be on the receiving end of mortgage defaults. However, since October 2021, lenders have assessed new borrowers on their ability to service a mortgage with a 3.0% buffer. The cash rate has leapfrogged the 3.0% to now be 3.5% higher than where they started so we may see an increasing number of mortgagors struggling and being defeated in the months to come.  

As I wrote last week, fixed-rate mortgages are reaching maturity soon and the fallout of that comes with many opinions on how mild or severe it will be. Likewise, as it takes time for these altered policy conditions to filter through, it is believed that existing borrowers on variable mortgage rates have not realised the full impact of these rate adjustments.

So far vendors’ reluctance to list their property for sale has assisted in artificially keeping the market afloat. Listings across the capital cities are -17.0% lower than a year ago - shifting the supply / demand ratio yet again – and prices are still higher than pre-COVID. Considering the factors mentioned above, it is not only difficult to say the market has or hasn’t bottomed out, but it is also possible to say that it may revert to a rapidly declining one.

What we do know, however, is that there are always lifestyle, financial and personal reasons to buy and sell, so the real estate market will continue to tick over. The question to answer is whether this decision will be a purely commercial one for you.