Interest rates… Potentially one of the greatest influencers on property prices, how high could they go? We have commented in earlier publications of the impact that inflation has on interest rates and how the Reserve Bank uses rates to influence inflation.
As anticipated, we saw another rate rise of 0.50% in July taking the cash rate to 1.35%. Although the cash rate is still relatively low the concern is the speed of which the RBA has increased rates in an attempt to slow inflation.
In a recent article by Senior Journalist Megan Neil on realestate.com.au, CBA updated their cash rate forecast with an expected peak in November at 2.6%. To put this into perspective the article notes a comparison by RateCity showing that if the cash rate does hit 2.6% the monthly repayments on a $1,000,000 mortgage could rise by $1,373 when compared to April 2022. To most this represent a significant impact on household budgets directly achieving the RBA’s goal of curbing spending. But will it work?
It seems that Inflation is primarily being driven by non-discretionary items (the essential items). This was analysed in a recent article (May 2022) by “The Conversation” and it noted that non-discretionary inflation was more than double that of discretionary inflation (the non-essentials, like TV’s, new cars, holidays etc).
Author Peter Martin noted “In the year to March, non-discretionary inflation (the price rises we can’t avoid) was a gargantuan 6.6% – well above the official inflation rate of 5.1%, and the highest in records going back to 2006. Discretionary inflation was only 2.7%. Not since 2011 has the gap been that wide, which makes this inflation unusual.”
With higher living cost and rising interest rates, there is speculation on the impact on property prices. In a recent Core Logic article, Economist Kaytlin Ezzy noted that “Growth conditions across Sydney weakened significantly over the period, with house values falling -3.0%. Tim Lawless Core Logics Research Director draws attention to a very important point.
He states “The trajectory of home values will depend on how fast and how high interest rates move, along with the performance of the broader Australian economy, labour markets and demographic trends. A stronger economy, along with the tightest labour market conditions in a generation, should help to ensure the ensuing housing downturn remains orderly”.
So while the smashed avo on sourdough just got a little more pricey and the iceberg lettuce costing more than the prawns in the cocktail, we all have to be thankful that we live in one of the most beautiful regions in the country. Stay safe, Trent Iverson. 02 8428 9191 | vellaiverson.com.au [email protected]
