Has the Market Peaked?

Last week’s official cash rate rise by the Reserve Bank, hot on the heels of some eye-brow-raising inflation figures has sparked discussion about house prices and affordability.

Certainly, an increase in interest rates usually does slow property markets, it follows that as the costs of borrowing rise, fewer buyers are able to compete in a market constrained by housing supply. Typically, real estate values moderate as interest rates rise.

We are already witnessing price adjustments in white-hot east coast markets where prices have risen by more that 20 percent in some cities in recent times. These price adjustments were probably necessary, the rate rise an obvious trigger.

Before we ‘run for the hills’, consider how different our local market experience has been compared to the rest of the nation. We remain enviably more affordable than east coast cities and our growth rate has been relatively subdued at about half that of Sydney and Hobart – for example.

We ought to remember that an official cash rate at 0.1 percent was an emergency setting; money was never going to be that cheap for very long. The fact that the cash rate has gone up is a positive indicator that life (and the economy) is returning to normal. A ‘normal’ cash rate setting is predicted by many to be about 2 percent which will keep borrowing for property purchases well within reach of those currently in the market looking to buy.

Our prudential regulator insists lenders assess buyer serviceability at a rate higher than what average rates are currently. This provides a handy buffer for mortgage holders as rates rise. Sure, other discretionary spending ($24 Avocado on Toast breakfasts is typically identified as necessary to give up) may need to be moderated as rates rise but that provides the Reserve Bank the desired outcome, inflation slows and rates moderate.

Meanwhile, supply of property for sale and rent remains at below average levels and demand remains strong with around 950 sales happening each week in the metro area. Whilst rising interest rates and inflationary pressures may adversely impact market confidence for a short period, I predict that once fiscal stability returns, the Perth property market will emerge as Australia’s best performer.

Our relative affordability, nation leading employment opportunities and lifestyle ought to attract newcomers from interstate and overseas. This rise in population will keep demand for property strong with prices and rents heading up as a result.

Sure, predicting property markets always involves an element of educated guesswork, but just about all indicators point to a stable, opportunist local property market with steady transactions and moderate growth for at least the next twelve months.