Reserve Bank Increases Cash Rate to 1.35%. What’s Next For the Property Market?

Reserve Bank Increases Cash Rate to 1.35%. What’s Next For the Property Market?

At the Reserve Bank of Australia’s Julys meeting, 05/07/2022, a decision was made to raise the cash rate by 50 basis points from 0.85 to 1.35%. It also increased the interest rate on Exchange Settlement balances by 50 basis points to 1.25%.

Summary 

  • Cost to rent and cost of living will increase.
  • There are still opportunities to get into the market
  • The household saving rate is still greater than it was before the pandemic
  • You need to act now!

This afternoon rate rise was the third rise in three consecutive months, and the cash rate is now the highest it has been since May 2019.

 

“Inflation in Australia is high but not as high as it is in many other countries,” says Reserve Bank governor, Philip Lowe.

 

“Global factors account for much of the increase in inflation in Australia, but domestic factors are also playing a role. Strong demand, a tight labour market and capacity constraints in some sectors are contributing to the upward pressure on prices. The floods are also affecting some prices.”

 

It is anticipated that inflation would reach its peak later this year and then return to the 2-3% level the following year. 

Inflation is projected to decline as global supply-side issues continue to ease and commodity prices stabilise, even if at a high level. 

Additionally, higher interest rates will aid in creating a more stable position between the supply and demand of goods and services.

What has affected the economy over June?

The month of June saw the war in Ukraine escalate. Commodity prices skyrocketed, cost of energy and fuel increased, and the rise in inflation shocked the international economy. As the war continues, the cost of living has taken another blow with increasing food prices!

Russia and Ukraine are one of the world’s major exporters and producers of agricultural produce. The planting of crops in Ukraine is under threat due to the conflict, impacting the world’s production of wheat, barley, maize, rapeseed, and sunflowers. 

According to the Food and Agriculture Organisation’s (FAO’s) recent study showed that Food Index Prices are at their highest since 1990.

 

FAO Food Price Index, Deloitte

The conflict adds additional to the already increasing food prices, which have been on the rise since mid-2020. This surge in cost is due to a number of factors;

  • Higher freight costs. 
  • Fertiliser prices have increased. 

Domestically, we’ve seen a significant decrease in consumer confidence as household budgets have been pinched by the higher mortgage rates and the increases in living costs, which have been worsened by the natural disasters and the recovery from them. 

Household necessities have seen particularly significant price hikes, with food costs rising by about 7% over the previous year and petrol costs already above $2/ltr nationwide.

However, there is a bright side to all this! The unemployment rate is at the lowest point in 50 years sitting at 3.9% nationwide. There is an increase in the demand for workers, and the wage rates are increasing. It will help bring back consumer spending, borrowing, and economic confidence.

June’s Property Market Update

Now we’ve covered what happened in the economy. Let us unpack what’s been happening in the property market last month! Throughout June, the housing market conditions became more varied compared to previous months.

Growth evaluations in Perth, Adelaide, and Brisbane performed the best over June. Although there has been substantial growth outside of Canberra, Sydney, and Melbourne, these trends are gradually rolling back due to high inflation, and rising interest rates. 

For the second month, Home Value Index declined to -0.6%, with value, falls in Sydney and Melbourne being the main drives for the drop. Values declined when there was a decline in consumer confidence, a rise in global unease, rising inflationary pressure, and the first increase in the cash rate since 2010.


“More recently, surging inflation and a rapidly rising cash rate have added further momentum to the downwards trend. Since the initial cash rate hike on May 5, most housing markets around the country have seen a sharper reduction in the rate of growth” Tim Lawless CoreLogic Research Director said.

Home Value Index 2022 June, CoreLogic

Vacancy rates are at an all-time low of 1%, making it very hard for people to get into rental housing, this in hand with recent land restrictions have meant there has been a decrease in housing supply.

Rents rose 0.9% nationally in June, bringing the annual growth rate to 9.5%. This is the fastest yearly growth rate seen since December 2007, when record-high levels of immigration from outside increased demand for rental properties.

“Such strong rental conditions through the current cycle have occurred largely in the absence of overseas migration, although the reopening of international borders is likely now adding further upwards pressure on rental demand,” Tim Lawless CoreLogic Research Director.

It’s not all bad news!

Last month, the Australian property market was valued at $10 trillion. Australia has 10.8 million dwellings, including houses, flats, apartments, semi-detached, row, and terrace houses. NSW accounts for 40% of Australia’s total value of homes, for a total value of $4.1 trillion. Followed by Victoria, which contributed 26.7 %, Queensland 16.7 %, and $2.7 trillion and $1.7 trillion, respectively, to the total. The rest of the states and territories account for 16.4%.

 

The increase in demand for labour and rising incomes may help somewhat reduce risk even as the effects of falling trends are spreading throughout the housing industry.

A chart detailing the total value of dwellings over the past decade. ABS

So what does this mean for you?

The implications of this rise for the average owner-occupier with $500,000 debt and 25 years remaining will see their repayments rise by $137. The same borrower would have already endured a $333-a-month increase from where interest rates were prior to May 2022.

However, at the same time, term deposit and savings account rates are starting to rise as well. 

The household saving rate is still greater than it was before the pandemic, and many households have built sizeable cash reserves and are now reaping the benefits of faster income growth.

Interest rates rising will have a knock-on effect on the rising costs to rent, this in hand with the decreasing vacancy rates, means it’s a good time to get your foot in the door.

There are still opportunities for you to get into property ownership! We have a number of complete and off-the-plan properties for you to choose from.

So don’t be left behind. Act now!