Easing inflation rates boosts confidence in property market
Despite interest rate and inflation uncertainties the market is signalling a recovery is underway, as seen in auction rates, house prices, rental vacancy rates, and a return of investment interest.
House prices are indicating an upswing after major cities were reported as experiencing a bottoming out in values, just a little over a month ago.
Increased speculation that the market has been through its correction phase and is ready for the upswing after the downturn in prices was shaped by the fastest and highest increase in interest rates for over a generation.
Off the back of record low interest rates, it caught many borrowers off guard but of course these interest rate rises were put in place by the Reserve Bank of Australia for one reason only ... to bring rampant inflation under control.
The trend of inflation
While much of the media has focused on the effects of higher interest rates, little attention was paid to the indicators of the trend of inflation and Australia was certainly not in isolation battling inflation and nearly all Western economies and developing economies were all battling the first strong inflation in over 40 years.
In major economies such as the United States there is evidence inflation is now dropping and sharply, which is also turning up in figures in Australia, following the third consecutive month of drops in inflation, so there is no surprise that the Reserve Bank paused with interest rates in April to take stock of how the recent rises have impacted.
There’s no surprise either that interest rates have risen ever so slightly in May, because there is very strong data coming showing the real estate market has not only bottomed out but is showing modest increases across the capital cities.
Impact of immigration
With the already announced huge jump in immigration numbers, more demand for residential property will be substantial and with new housing constructions still in decline it is evident that real estate prices are going to be facing a strong surge.
We already see in auction results around the country that the success rates on the day of auction are frequently at levels seen during a boom market. Inspection numbers at open homes have risen back to levels also aligned with boom market conditions.
Sure, results vary from state to state and even regions within a state but overall, there is incredible strength emerging right across the real estate market.
Interest rate cycle
Where there is consensus at present is that we are either at or very close to the top of the interest rate cycle. The Reserve Bank is playing with fire if they look to increase rates much further as the impact on the economy is also being felt with many industries reporting substantial slowdowns. Higher interest rates or a sustained period of the same interest rates we are now at will do untold damage to the economy, so there is no surprise we are seeing increased speculation that before years end, interest rates will start easing.
This accounts in part as to why there are so many buyers coming back into the real estate market as they recognise with the return of increasing numbers of buyers, competition will see prices increasing and therefore they’re best to strike early.
This is putting increased pressure on the rental market and so tenants will be faced for many years to come with acute shortage of rental properties and ever escalating rental prices.
Never in my 45-plus year career have I seen better yields on rental properties than today and with the strong property gain that comes from owning the property for property investors this is the best environment in over 50 years.
The rental market is seeing no joy whatsoever for tenants, but with record migration underway the great majority of those migrating are first renters and will impact the market heavily. Add to that the number of overseas students returning to their studies in Australia which was listed at 140,000 in March and you can see why there is unprecedented demand for rental properties.