After several years of record low interest rates, the Australian economy, property market, and real estate industry should be prepared for rising rates in the new year. Whilst this may be unwelcome news for property investors, could it also have positive impacts? We weigh in on the issue and discuss everything you need to know.
Earlier this month, the big four banks stated that our record run of low-interest rates is over. After a downward trend lasting more than five years, speculation is growing that the Reserve Bank will increase rates in the new year, with some economists predicting a 50-basis point increase by 2018.
Just last week, CBA, NAB, and Westpac all raised their mortgage interest rates- a strong indicator that the trend is changing. Increasing uncertainty on global debt markets after the US election and consequent Trump effect, which are increasing international funding costs, have led to banks increasing their mortgage rates. What’s more, this week the US Federal Reserve announced an increase to their interest rates amid signs of low unemployment, firming inflation, and economic growth. With more US rate increases expected in the new year, this has economists predicting Australia’s speculated 2017 rate hikes are even more likely to happen.
However, if the predicted rate hikes do take place, they will be modest and gradual. Since the Australian economy is still relatively sensitive, experiencing record level household debt, and the record low mortgage rates are now coming to an end, the Reserve Bank will increase the cost of debt, but do so slowly.
So, how might the predicted 2017 rate hikes impact our economy and property market? If interest rates were to significantly increase, many property owners and investors would struggle to service their loans, especially first home buyers. As a result, we would see more properties hit the market, leading to an oversupply in the marketplace and drop in housing prices. As such, after almost five years of strong property value growth, this trend will most likely end. Hitting investors with higher rates may also worsen the residential construction slowdown, which will contribute to overall economic slowdown.
However, it is not all doom and gloom for our property market. Whilst rising rates mean more interest must be paid on loans, investors will also experience greater deductions and tax benefits. Historically, rents should also increase and, coupled with tax benefits, this can lead to good results for investors. What’s more, with rates predicted to slowly increase over the next two years, this gives investors time to create cash buffers to weather the changing economic conditions.
There is also no shortage of positive impacts for our economy. If interest rates increase, it means that our economy is becoming healthier. This means that consumer confidence is on the rise, people are spending again, unemployment is going down, and wage growth is increasing. As a result, people feel more secure about their jobs and naturally want to spend, which extends to buying property. This will help stabilise and strengthen our current fragile economy.
It’s clear that the industry should brace itself for interest rate rises in the new year, and a consequent cooling of the hot real estate market. What could this mean for the industry? The main impacts will be seen in our consumers’ changing buying, selling and renting behaviours.
With the low levels of stock available, rising rates could mean that more property owners bring their properties to market next year. But, high rates mean interest rate payments are high too, which could discourage prospective buyers from taking out mortgages. This generally leads to a reduction in the number of buyers in the market, which creates an oversupply of property. What’s more, the banks’ out-of-cycle rate rises are a sign that further negativity may come to the residential housing market in 2017.
But, it’s not all bad news. Whilst our consumers’ buying behaviours will change if interest rates increase, it does not necessarily mean for the worse. Interest rate rises also positively impact the property market, and therefore real estate industry. The main potential benefit is that an oversupply of properties usually means housing prices drop. This may allow more first home buyers to enter the market, provided they have created adequate cash buffers for their loans. As such, rate increases could help ease the housing affordability crisis in the new year.
Whilst the speculated 2017 interest rate hikes may bring both positive and negative impacts to our economy, property market and industry, as real estate professionals it is our job to be across these market movements so we can continue to help clients make the best property decisions. If we can provide this professional advice, we will continue to win business no matter what economic conditions our industry is up against.
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We’d love to know your thoughts on the speculated interest rate increases and how you think they could impact the real estate industry. Email me your thoughts at firstname.lastname@example.org.