There is no way of sugar-coating it: the Australian economy has experienced a slowdown. And while it has led to the easing of labour market conditions, with the economy remaining relatively tight, at the Reserve Bank of Australia’s July 4th meeting, the bureau decided to pause rate increases due to economic uncertainty. This decision comes after The RBA’s implementation of 12 consecutive rate hikes.
The Road So Far
Experts agree that the need to assess the impact of Australia’s previous actions on inflation and overall economic health has never been more pressing.
On July 4th 2023, the RBA decided to hold the cash rate steady at 4.1%.
In a media release from the RBA, governor Philip Lowe was saying that although inflation remains exceptionally high, and is theorised to stay that way for some time, it had already “passed its peak.”
The release furthers that the monthly CPI indicator for May displayed further declines. With these in the cards, modern life in the country has become challenging across all sectors, ultimately compromising how the economy functions. And as to be expected with rising inflation rates, it erodes the value of savings, makes it more difficult for businesses to invest, widens income gaps, and outright harms household budgets. Experts believe that should the climbing inflation rates be ingrained in every Australian’s expectations, they would prove costly to reduce in the long run. This would result in higher interest rates and greater unemployment rates. That said, it is well within everyone’s interests to return inflation to target within what the RBA considers “a reasonable timeframe.”
Within the RBA meeting, Lowe stated that there is much to do. He goes on further to say in an article from The Guardian: “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve,” He added, “The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”
Confidence Re-established
Let’s say it like it is: Homeowners who have a mortgage are at an advantage with the RBA’s decision.
While some analysts think that the housing market is still at the edge of uncertainty (and that it is unlikely to motivate housing market sentiment), the halt in the rate increases has restored buyer confidence in the housing market.
In an article from The Property Tribune, Aus Property Professional’s Lloyd Edge went on record to say that he believes that the RBA’s decision will restore buyers’ confidence for the property markets. He recognises that it is the risk-averse buyers who find such a condition unfavourable, leading them to leave the market. They would only return when market conditions become stable again.
Edge says that what risk-averse buyers cannot grasp is that it is in times of market uncertainty that excellent buying opportunities present themselves. Because of the wait-and-see approach, these buyers are only missing out.
The halt is projected to result in more properties entering the market in light of Australian mortgage holders being compelled to sell and delve into the rental market to look for properties in more affordable areas.
These conditions will continue the upward pressure on rents due to increased demand for rental properties. And because of the increased demand for cheaper properties, it will also put pressure on the lower end of the housing market. It is predicted that it is in the middle to higher end of the market where a drop in prices would be seen.
These become possible in light of the strict approval criteria for mortgages that considers both the predicted and unpredicted interest rate hikes. Further, housing market participants will see more stock entering the market for sale. This provides buyers with greater negotiating power more property options.
What It All Means For Regional Centres
The RBA’s Illustration depicting the impact of RBA’s rate decisions on the housing market
Investors believe that regional towns such as Armidale, Bundaberg QLD, and NSW and coastal towns in the Shoalhaven region and Central Coast stand at benefitting the current market conditions. Homebuyers and property investors are at an advantage because these regions offer exceptional lifestyle options, schools, hospitals, and job opportunities.
What Kind of Impact Will The Commercial Real Estate Segment Feel?
If anything, the commercial real estate market will be impacted by the rate increase halt, albeit minimally.
In a statement, Peter Vines, the Managing director of Ray White Commercial Western Sydney, said that borrowers are already stretched. This leads him to believe that the effects of the past rises will manifest in the succeeding six months from July 2023.
But the investors who may see actual benefits from the commercial properties segment are the savvy ones. We must note that it is in this area of the market that long-term ROIs are strong. These opportunities may manifest themselves to savvy investors through the following:
Childcare
Investing here is a wise and profitable decision, with nearly full occupancy rates. Unlike a standard two-year lease this segment allows tenants to commit to a 10-year lease, providing owners with a stable source of income and the potential for exponential commercial growth.
Industrial
The online shopping sector in Australia is booming, leading to a high demand for warehousing. This presents an excellent opportunity for developers, especially in Western Sydney, where industrial-zoned land near the upcoming Western Sydney Airport development is particularly valuable in the long run.
Unit Blocks
Augmented demand may be seen even in the face of interest rate movements. The more seasoned investors will be pursuing these opportunities.
Apart from these, the rate increase halt may present commercial borrowers some reprieve. However, market participants have yet to see the effects of asset valuations on financing arrangements.
In an interview with The Property Tribune, Stamford Capital’s Domenic Lo Surdo said that although most commercial borrowers may experience minimal impact, valuations are bound to reset at the margin. Surdo says that while valuations adjust and property assets trade, the assets will reset downwards, effectively reflecting the changes.
Predictions- The RBA’s Rate Implementation
The RBA’s Illustration depicting the impact of RBA’s rate decisions on the housing market-predictions by Maple
The Commonwealth Bank of Australia (CBA) is expecting that in its August 1st meeting that the RBA will hike rates to 4.35% so as to reach a peak. Meanwhile, ANZ stated in an interview with The Guardian that it was “reluctant to back away from our call of a 4.6% peak just yet”. Adam Boyton, the ANZ’s Australian economics head is apprehensive that it will reach that level given the RBA’s halt in interest rates.
How Things Are Looking with the RBA’s Rate changes
The RBA’s Illustration depicting the impact of RBA’s rate decisions on the housing market-maple property group
The Reserve Bank of Australia’s decision to halt the increase in interest rates has brought about several significant benefits to the housing market in Australia. This prudent approach has effectively mitigated potential risks and assists in reestablishing confidence in the real estate sector.
The decision has provided relief to existing homeowners and property investors. With interest rates remaining unchanged, mortgage repayments have remained affordable and predictable. This stability helps to alleviate financial stress, providing homeowners with a sense of security.
The halt has also encouraged potential homebuyers to enter the market. Low and stable interest rates have made borrowing more accessible, enabling more Australians to realise their dream of homeownership. This may contribute to increased activity in the housing market, boosting demand and stimulating economic growth in the long run.
However, it is important to note that the Reserve Bank’s decision to halt rate increases should not be seen as a permanent measure, but rather as a well-timed intervention to maintain balance and mitigate potential risks. As the economy evolves, the central bank will continue to monitor key indicators and adjust policies accordingly.
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