Is there more to come?

The frequency of news articles citing the cost of living, rising rents, housing affordability, inflation and interest rates has been exponentially increasing since the RBA announced the first rate increase of this cycle in May 2022.

But where are we now and where are we going?

Despite the RBA governor warning us to expect another rate increase at last month’s meeting, there was some reprieve when he announced this week that they were keeping them on hold for now at 4.1%. With inflation still causing an economic headache for the central bank, they have left their options open and been more cautious when it comes to forecasting rate changes.

Inflation is at the forefront of the cash rate decision process and as we saw in April last year, this is not always predictable and reliable. We are yet to see the June quarter figures but there is growing unease which is filtering through to consumers who have applied the brakes to some degree in the past month.

As we know, consumer sentiment and the housing market are closely related. Even if the imminent news is not bad, uncertainty has an equal effect. People tend to be risk averse, choosing to wait out the changes rather than play the game. We see potential participants retreat from the market and activity slow. On the flip side, there is a risk that as house prices rise, inflation could be kept higher for longer as homeowners feel wealthier and more willing to spend, and the RBA examines this trend closely.

Aside from the ethereal effects of sentiment there are more tangible influences that are at play here. Mortgages are a fact of life for most property owners. The average variable mortgage rate for new owner occupier loans is approximately 5.9%. With a three percentage point serviceability buffer in place, new borrowers will be assessed to repay their loan at a mortgage rate close to 9%. The combination of high cost of living pressures, negative real income growth and the high cost of debt have made it hard for borrowers to obtain credit approval, especially with lenders less willing to lend on high debt-to-income ratios, high loan-to-income ratios or on smaller deposits.

March, April and May this year were strong months for house prices. It was reminiscent of a booming market but, when dissected, it was clear that stock levels were seasonally low and demand was outstripping supply leaving buyers competing heavily for the few options on offer.

To date, the majority of borrowers have kept on track with their mortgage repayments, and while the portion of borrowers defaulting on their mortgage is likely to rise, there are some opposing factors like low unemployment, record net overseas migration and extremely tight rental conditions which should help to prevent mass arrears.

On the ground

There is always demand for good housing and stock levels remain low for now (around 26% below the previous five-year average). With reluctance seeping into the market again in June, we have seen a slight lengthening in days on market, reduction in the number of registered bidders at auction and decline in auction clearance rates. Buyers are becoming more sensitive to price guides and less willing to extend their borrowing beyond what they would be comfortable with should rates rise even further.

If you are looking to sell in this environment, don’t rely on high demand getting you the best price. Make sure you stand out in your market with excellent presentation and marketing.

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.