In recent years, the real estate sector and borrowers alike have grappled with the relentless rise of interest rates, significantly impacting many Australians ability to enter the housing market amidst limited supply.
However, amidst this economic flux, signs point to a potential reversal: as forthcoming rate cuts could ignite another wave of property price increases in the second half of the year.
Despite the Reserve Bank of Australia (RBA) swiftly elevating the Official Cash Rate (OCR) from near-zero levels to 4.35 percent, emerging signals hint at a possible turnaround. Economic indicators, potentially more dire than officially acknowledged, are surfacing. Weakening employment statistics and a two-year peak in the unemployment rate at 4.1 percent signal an impending economic slowdown. If this trend persists, the RBA might opt for rate cuts sooner than expected even though the rhetoric remains hawkish at present.
Financial markets are already adjusting to the prospect of interest rate reductions later this year, echoing trends seen in the United States. Should global economic conditions deteriorate further or more rapidly, central banks, including the RBA, may hasten rate cuts to support the economy and employment if necessary.
Simultaneously, the weight of exorbitant mortgage payments increasingly burdens homeowners, especially in the inner metropolitan areas of Sydney. As mortgage payments devour a larger portion of household income, the clamour for relief intensifies.
An entry-level house in Sydney would require 57.2 per cent of the combined income of a couple aged 25 to 34 to service the loan, a sharp rise from five years ago when only 35 per cent was needed. For units, 37 per cent of the couple’s income would be required to repay their mortgage.
“The fact that it’s taking 57 per cent of people’s income to pay a mortgage, means that the entry-level house Sydney-wide is not attainable,” said Nicola Powell, Domain’s chief of research and economics.
Affordability has also worsened across the combined capitals, with starter houses priced at $545,000, requiring 46.5 per cent of income and entry units 30.7 per cent.
Mortgage repayment on an entry house in Melbourne now takes up 45.4 per cent of the couple’s income, Brisbane 42.7 per cent, Adelaide 42.1 per cent and Hobart 40.3 per cent.
Many prospective buyers find themselves priced out of the market by prevailing interest rates. Despite calls for increased supply and the Federal Governments promise to deliver 120,000 new homes over the next five years, much of the available inventory fails to meet buyers’ needs. Properties located an hour or more away from the central business district (CBD) or compact apartments often prove impractical.
Currently, a notable undersupply of quality homes persists, especially newer properties in desirable locations, perpetuating upward pressure on prices.
Consequently, if the RBA decides on rate cuts, a surge of eager buyers awaits, poised to act as soon as affordability improves. This could create a window of opportunity for buyers to capitalize on as current rates continue to pressure existing home owners. Indeed, swift action may prove advantageous compared to waiting for rates to drop further if this scenario plays out over the course of 2024.
Already, we’re observing a surge in listings in cities like Sydney and Melbourne, marking a 20% increase compared to the previous year. Buoyed by market strength, vendors are gaining confidence to list their properties whilst the high auction clearance rates are showing that the increased level of stock is being absorbed quite quickly by eager buyers. The CoreLogic national sales numbers seen over the year to January 2024 (496,926) are 3.6% above the average annual volumes seen over the previous 5 years
However, should rates decline unexpectedly, brace for a rush of buyers at open houses. Similarly, any indication from the RBA of an impending rate cut is likely to spark a similar effect.
For those with secure employment and sufficient financial resources who are nimble enough to act, this may present a golden opportunity to secure a property before broader market sentiment shifts.