Tight Supply Still Putting Upward Pressure On Property Prices

In the past few weeks, we’ve been hearing a lot more talk about supply rising and new listings coming onto the market. With interest rates rising at a record pace, there are some out there that are suggesting we are going to see an influx of new listings as we head into the Spring selling season and that this will provide a significant negative impact on property prices. However, in reality, that’s not what we are seeing on the ground at the more premium end of the market. In fact, it’s quite the opposite.

There’s no doubt that higher interest rates are making life more challenging for homeowners and new buyers. Higher serviceability limits alone are restricting how much people can borrow and this impacts all types of buyers unless you are looking to pay all cash.

However, it’s the borrowers who are on the lowest incomes are the ones that are being most negatively impacted by rate hikes and the increased cost of living. According to new data from S&P Global Ratings, mortgages more than 30 days in arrears are highest in Sydney’s southwest, with 2.5 per cent of borrowers behind in their repayments. This is followed by borrowers in Perth’s north-west, Melbourne’s north-west and the Blue Mountains in NSW.

These are classic mortgage belt areas, where borrowers are typically first-home buyers on very high LVRs and with lower, more constrained incomes due to most of the income being necessary to pay non-discretionary living expenses. This makes it so much harder for these households to try and manage their repayments and meet their other essential requirements.

At the premium end of the market, there are really no signs that demand has been significantly impacted, and by far and away, the biggest issue that most buyers are facing is simply the lack of quality stock on the market.

We have a large number of clients who are preapproved by various banks and are ready to buy and who are still looking to find a good quality home in Sydney. In the sought-after middle to inner ring locations, there really isn’t any new stock coming onto the market, and when new listings appear, they are snapped up pretty quickly. This imbalance in supply and demand means prices continue to drift higher as buyers are still forced to fight over what stock there is available.

This is counterintuitive to what we hear in the media, but it’s the reality of the situation for those looking to purchase at the more premium end of the market.

With that in mind, I do think we are going to see prices of quality real estate assets continue to firm for the rest of this year and into next year. Since the start of this year, house prices in Sydney have rebounded sharply, with data from Domain showing that values have already recouped two-thirds of the falls from last year.

At the same time, based on the fact that inflation is continuing to cool down and head in the right direction, it’s also very likely that we are getting very close to the peak in the official cash rate. When the RBA indicates that it is done hiking, history would indicate that this is going to very quickly change buyer sentiment and add even more demand to the current buyer pool.

On the back of the CPI figures alone, there has already been a surge in interest from buyers, so we can only imagine what that will look like when the RBA eventually hits their peak and says they are done raising in this current cycle.

For now, buyers are faced with some enduring challenges in securing quality property in sought-after areas. There are still some opportunities out there if buyers have some flexibility in their housing needs, and I’ve been suggesting that if you don’t need a home to live in right now, buying a premium off-the-plan townhouse or apartment could be a good idea as it will allow you to ride out the peak in this current rate hike cycle and still capitalise on the upside potential of the next few years. It is very difficult to find these types of properties in most of the major capital city markets, and also requires significant due diligence to provide comfort that the builders will be able to complete the properties as intended.

If inflation does persist, then we know that it generally does favour those who own real assets; otherwise, if it cools faster than anticipated and unemployment rises more quickly, then the RBA will be in a position to cut rates, which will potentially only add more fuel to housing demand and house prices.

Either way, if we disregard market regions that lack quality investment appeal at any stage of the cycle, there are still plenty of bullish signs for property prices in the current environment.

I will be covering many of these issues in more detail on our Youtube page ..click on the link to see our Australian Property & Finance Mid-Year Update