WARS, RUMOURS, AND RATE RISES

APRIL PROPERTY REPORT

Market analysts are predicting the fallout from the Russian invasion of Ukraine could potentially slow residential property sales and accelerate the decline in prices by 15%. However, similar predictions were had at the start of the pandemic. Despite 6 state lockdowns, housing prices jumped 35% in less than 3 years setting new records for the industry. It has us all questioning, will the war be the event that slows the market or is it just an excuse?

 

Over the past 35 years, we have been extremely fortunate to see the Australian property market perform well during major crises. We’ve seen pandemics, terrorists’ attacks, financial crisis, wars, and natural disasters just to name a few. Experts are now exploring the potential economic impact of the war comparing it to the 1970’s “stagflation”. Stagflation refers to a period when unemployment rates rise, and economic growth slows coinciding with the rising cost of living. The main threat from the crisis in Ukraine is an even further hike in inflation which in turn adds pressure for interest rates to rise, thereby adding to the slowdown of the property market that is already in progress. AMP expects prices to drop by 10-15% this year.

The war is keeping the market more volatile than usual due to the uncertainty. History shows that major worldwide crises cause short-term declines which is promptly rebounded once tensions are eased. The biggest threat from the war is the rise in oil, energy and therefore inflation. With Russia being one of the major producers of important goods such as oil, gas, and wheat, it’s no wonder commodity prices are considerably higher. We’ve all felt the pinch of petrol prices reaching $2 per litre and even Woolworths has raised their prices by 2-3%.

 

 

Other attributes causing a fluctuation to the market is the hike in construction costs for new homes. Building costs rose by 7.3% in 2021. That’s the quickest rise since 2005 mainly caused by the high cost of timber and short supply of materials. With such a hefty increase in construction costs over the last 12 months, this will contribute to more expensive new homes being built and bigger renovation costs placing added pressure on inflation, and ultimately, house prices. As international production levels start to increase due to the world recovering from Covid-19 we hope to see improvements to timber and material prices and a balance of stock this year.

With all these factors in mind, we firmly believe rates will rise this year, but how high can they go? Interest rates are predicted to rise gradually from June 2022 to the first quarter of 2023 to a cash rate of 1.25%, this may happen in stages. The Reserve Bank of Australia estimate over one million home borrowers have never experienced an increase in mortgage rates. The Commonwealth Bank of Australia expects the RBA will pause its rate rise cycle as a large portion of low fixed-rate mortgages will be due to expire forcing borrowers to refinance at a higher interest rate having a significant impact on household finances.

There are many rumours floating around out there making it difficult to decipher what to believe. These rumours often create anxiety and tension in the marketplace and in communities, and for good reason. However, it is important to remember that these forecasts generally don’t take into consideration the strength of the Australian economy, the housing shortage, and the resilience of the property market. Finishing on a positive note, we anticipate our local markets to see a steady rise over the course of the year, bolstering the prices we have already achieved in 2021. We hope you all have a safe Easter period and we look forward to updating you in the next issue.

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