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Interest rates and lending buffer see investors stuck on the sidelines

The rapid increase in interest rates is continuing to weigh on property prices and is making it more difficult for buyers to enter the market, according to a new report.

The PIPA National Market Update found that tighter lending standards and an inability for borrowers to get finance is hurting demand.

PIPA Chair Nicola McDougall said the significant uptick in rates in such a short period of time has resulted in many borrowers, and especially investors, not being able to secure lending.

“Many of these borrowers are stuck on the sidelines due to the servicing buffer of 300 basis points still being applied to lending applications – even though interest rates are significantly higher now than when APRA announced the measure in October last year,” Ms McDougall said. 

Ms McDougall said this was a similar situation to what occurred in 2017 when APRA tightened their serviceability buffer.

“There is an element of déjà vu about this situation, with a similar circumstance occurring when caps on investment lending as well as higher rates more generally for investors wiped out lending possibilities for many during the 2010s,” she said.

“The flow-on effect from that decision was the continued reduction in investment activity – especially from 2017 – which hit rock bottom at the start of the pandemic, when the percentage of investors active in the market was just 22.9 per cent compared to a long run average of nearly 35 per cent.

“While opportunities clearly exist for homebuyers and investors in the current market, it they are unable to secure finance then we are likely to see a further reduction in prices as well as sustained downward pressure on vacancy rates for some time yet.”

Despite property prices falling on a national level, it’s the larger capital cities that are being hardest hit.

Adviseable Property Buyer, Kate Hill said the sentiment out there across New South Wales is mixed among buyers and sellers.

“It’s muted and cautious in some quarters because of the sharp and unexpected level of interest rate rises and it’s buoyant and opportunist in others as people try to sniff out a bargain,” Ms Hill said.

“Low stock levels continue across the board and while there are still good attendances at some opens, others are reporting much reduced attendance numbers. It’s like early pandemic days conditions. 

“Many of the more prestige Sydney markets are struggling to drum up any real action, which is typical in the earlier stages of a flatlining market.”

Buyers’ Advocate Cate Bakos said Melbourne has exhibited a reasonable degree of resilience so far in 2022.

“While those who haven’t ever experienced increasing interest rate environments remain jittery, more mature property buyers and investors alike have broadly remained committed to their property acquisition plans,” Ms Bakos said.

Ms Bakos said regional prices have remained strong while the inner city has performed best.

“This LGA outperformed every other this year so far and it can be put down to the combination of our city appeal rebounding and regional escapees doubling up their housing options with a city pad in tandem with their country house,” she said.

Buyers Advocate Joanna Boyd said the Brisbane property market has officially settled down into somewhat “normality”.

“Over the past months, we have observed what appears to be a ‘Mexican standoff’ between sellers and buyers,” Ms Boyd said.

“Sellers are still setting prices in their minds with figures that were being achieved six months ago, whereas buyers are not feeling as pressured to pay for a property above what they perceive to be the current market value.”

Prospa Property Advisory Director & Principal Strategist, Adam Hindmarch said the South Australia property market has remained strong over the current quarter, however we are starting to see signs of things cooling.

“Local real estate agents are still reporting strong buyer activity in Adelaide however buyers have certainly become a little more apprehensive than they had previously been,” Mr Hindmarch said.

“The days of receiving multiple offers over asking price seem to have subsided, with agents needing to negotiate a little harder to get sales across the line. 

“The common theme still remained that renovated or brand-new properties were still attracting the strongest interest and achieving better prices.”

Performance Property Director David McMillan said the Perth property market remains solid given the relative affordability compared to the eastern states.

“Looking forward, interest rates are set to rise further, and this is bad news for Sydney, however, it’s highly unlikely to stop the positive momentum in the Perth market as it will still be affordable after these rate rises occur,” Mr McMillan said.

Pure Property Investment Managing Director Paul Glossop said the Tasmanian market is now starting to turn down.

“Undoubtably the Hobart, Launceston, Devonport, and Burney markets have well and truly still outperformed the Australian averages over the past five years – both on capital growth and rental yields – however, those heady heights of growth and increased cash flows look to be set to subside (at least on the capital growth front),” Mr Glossop said.

“We expect that the Tasmanian market in general will go through a transitional phase over the next two to three years where it will see a decrease in value to the tune of 5 to 15 per cent and hold steady at that stage for the coming one to two years following.”

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.

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