What factors really affect the property market?
Are we heading into a slowdown in the property market as we approach the colder months?
It’s a commonly held thought that real estate is a seasonal market; booming over the warmer months and quiet over winter. But it seems that there’s much more to it than that, and in fact seasonality doesn’t really exist.
Susan Spence, Principal and Licensee of Harcourts Kiama explains that market conditions are far more related to economic conditions than the seasons. “The slightest change in interest rates can shift the market considerably,” she says.
“The recent low interest rates has kept the market very buoyant in the Kiama region and in some cases homes are being snapped up for record prices before we even have a chance to host an open home,” she goes on to say.
So what can we expect in coming months?
Well, there are plenty of opinions on the state of the property market.
In a recent article published by Corelogic, following the RBA board decision in March to keep interest rates on hold, writer Tim Lawless says that, “The renewed exuberance in the housing market over the past eight months is due to more than just low mortgage rates. The reacceleration in capital gains also coincides with a substantial rebound in investment purchasing activity which has been a key driver of market demand and upwards price pressures.”
He goes on to say, “The predicament for the RBA is clear, they are unwilling to drop rates because this would likely add further fuel to the housing market; they don’t want to push rates higher as this will stifle consumption and investment more broadly as well as potentially place some upwards pressure on the Australian dollar.”
It therefore seems unlikely that interest rates will shift significantly, particularly in light of high household debt.
In another article published by Corelogic, writer Cameron Kusher examined the relationship between household debt and interest rates off the back of an interesting comment made by Reserve Bank (RBA) Governor Phil Lowe who suggested in early March that if it wasn’t for the strength of the housing market, and a fear of inflating it further, official interest rates would be lower.
Kusher writes, “Inflation is currently well below the RBAs target range and the country is not at full-employment which would indicate the RBA should be considering interest rate cuts. Clearly the economic prosperity and welfare of Australian people (linked to dwelling value growth) is a key reason why they are not cutting interest rates.”
According to Kusher’s analysis there are a number of factors taken into account in the RBA’s decision monthly decisions on interest rates, which include inflation, wages growth, and household debt. Inflation is not on track yet, wages growth is sluggish and household debt seems set to remain high, which seems to indicate that interest rates will remain at current levels for a while yet.
Are there any other factors that could affect the interest rate?
The ABC reported in its news bulletins on the 8th March that an interest rate rise in the USA could affect Australian mortgage rates, which would come about as the resulting increase in the cost of wholesale funding on international markets.
“Markets had believed a May interest rate hike was more likely than March, until Federal Reserve chair Janet Yellen spoke on Friday and made it abundantly clear that rates will rise sooner rather than later, and Australian borrowers should be prepared.
"Higher global rates mean higher wholesale funding and the Aussie banking sector needs more wholesale funding than other banking sectors in the world," said George Boubouras, chief investment officer from Cantango.
This will likely flow through to households as banks increase mortgage rates to compensate.”
What does all this mean for buyers?
It would be reasonable to assume that, while the near future appears set to continue with low interest rates, it won’t remain that way for ever and buyers in the market should budget for interest rate rises in calculating whether they can afford a property.
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The property market is affected by many factors, so it makes sense to do your homework, read widely and work with an experienced real estate agent that you trust.