Buyers waiting for price reductions will be disappointed

The Reserve Bank of Australia has made it clear it wont be increasing the cash rate soon, causing a high demand for houses from investors.

The Announcement:

Interest rate risk overstated

Property buyers waiting for promised price reductions will be disappointed, according to Pete Wargent, co-founder of Australia’s first national network of property buyer’s agents, BuyersBuyers.

Mr Wargent said, “low mortgage rates are still attractive for investors, and asking rents are rising much more quickly now, up by about 10 per cent over the past year. Activity in the housing market is robust and likely to pick up as Sydney and Melbourne restrictions ease”.

“Recently there have been some calls for the Reserve Bank to increase the cash rate sooner than previously expected, markets looking for a potential increase of up to 1 per cent in 2022, but even in that scenario mortgage repayments would remain comfortable” Mr Wargent said.

Doron Peleg, CEO of RiskWise Property Research, said “it is unlikely that there will be an increase in the cash rate in 2022. The RBA has made it clear that a number of conditions need to be met for the cash rate to increase. Primarily, the inflation rate should be sustained (i.e. over a few quarters) within the 2 to 3 per cent range, which is the bank’s target”.

Me Peleg said, “some of the major contributing factors to the current inflation rate include commodity prices and supply-chain issues. These are global factors and are likely to be mitigated over time. Employment conditions and wages growth should be improved solidly over the next few quarters. Still, the immigration reboot is likely to take the pressure off wages growth again later next year.”

“Combined with elevated under-employment and underutilisation, this means it’s unlikely that wages growth and employment measures will show a consistent improvement so quickly. So when the cash rate is finally increased, it’s also highly likely that the increases will be gradual to assess the impact on markets” Mr Peleg said.

Solid demand for housing

Pete Wargent of BuyersBuyers said, “In New South Wales and Queensland, we are certainly seeing that the incomes of some of our buying clients are increasing for professional roles due to the current skills shortage. In addition, lending figures and historically strong auction clearance rates over the past week also show that the market remains strong.”

“The immigration intake next year itself will only add to housing demand, and it should be noted that houses and other family-suitable properties are experiencing strong demand across many areas of the country” Mr Wargent said.

Interest repayments and out-of-pocket costs remain low

Mortgage interest repayments, which form a large proportion of the out-of-pocket costs for investors and owner occupiers, remain very low.

Mr Wargent said, “last quarter, we saw a record share of borrowers taking on fixed-rate terms, confirming that property insiders agree the bottom of the interest rate cycle is in.”

“But context is important, and the share of household income expended on interest repayments is tracking close to as low as we’ve seen over the past four decades. Even 100 basis points of interest rate increases from here can be absorbed by the market, as interest rates (and consequently monthly repayments) will still remain favourable in comparison to historical averages” Mr Wargent said.

“For example, the fortnightly repayments for an 800,000 principal and interest home loan, taking out for 30 years, would likely be increased by around $200. The top-end of the market may be more impacted by such a move, but overall the demand for housing finance we expect to remain strong.”

Figure 1 – Interest repayments

“At the coal face, we are seeing many more auctions and listings come online now in Sydney and Melbourne, which is a healthier dynamic for the market and will naturally cool the rate of price growth. But overall, activity is still very buoyant, and we definitely expect to see prices higher than today by the end of 2023” Mr Wargent said.

Steadier price increases forecast

Doron Peleg, CEO of RiskWise Property Research, also said that the property market research firm expects to see dwelling prices rise next year.

Mr Peleg said, “we don’t expect the Reserve Bank to increase the cash rate in 2022, and there is fierce competition between banks and non-bank lenders, keeping a certain level of downward pressure on mortgage rates”.

“We expect to see dwelling prices rise by between 5 per cent and 8 per cent in 2022, in the absence of substantial macroprudential restrictions. And two years from now we expect to see dwelling prices that are higher than today” Mr Peleg said.

Figure 2 – Dwelling price forecasts

“Nationally, we expect a price increase in the range of 5 to 8 per cent in 2022. Houses and other family-suitable properties – particularly in the more affordable areas in New South Wales, Victoria, and south-east Queensland – are expected to be at the higher end of that range. However, properties at the top-end of the market are likely to deliver slower capital growth” Mr Peleg said.

“Overall, it is likely that dwelling prices in a couple of years will be higher than the current prices. Prospective buyers who are now waiting for price reductions will probably be disappointed.”

Pete Wargent of BuyersBuyers said that mortgage brokers are currently busy adjusting to new serviceability rules, but mortgage demand remains fairly bullish as COVID restrictions are eased.

“Election years come with their own uncertainties, but the talk of significant price declines due to a fast interest rate hiking cycle is overdone. We expect 2022 to be a very busy year for housing market transactions, especially for investors. Buyers waiting for the promised price declines will likely be disappointed, in our opinion” Mr Wargent said.

Source: Medianet

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