Sentiment has noticeably weakened and this is putting downward pressure on house prices across the country. It is creating opportunities for buyers, but anyone transacting now should do so carefully.
In today’s newsletter I summarise why the rate path is now biased upward and I offer a mental model to sensibly weigh up your next move…
Will interest rates be higher-for-longer?
Markets are now pricing ~ 56 bps of RBA hikes by November and a cash rate around 4.65% (the current cash rate is 4.1% and the next RBA meeting is on 5 May).
Inflation is being tested by two fundamental issues, and these are both separate to the more recent energy price shocks from the conflict in Iran…
The productivity issue:
- The production of services, as opposed to goods, are a large part of modern economies like Australia (e.g. healthcare, education, hospitality, professional services)
- Even in weak‑productivity environments, wages tend to rise in tight labour markets, and services are labour-intensive
- The issue is that if productivity doesn’t improve then higher wages cannot be offset and so businesses will try to pass on their higher costs by raising prices
- This is how a wage-price spiral starts and therefore services inflation is said to be sticky
The fiscal policy issue:
- Government spending as a share of GDP has recently been at its highest level in Australia since World War II
- Large government spending programs compete with the private sector for labour and therefore employers must offer higher wages to attract staff
- Poorly targeted or inefficient government spending can funnel resources into low-productivity sectors with little output gain (it can be stimulative without increasing the supply of goods and services commensurately)
- Interest rates could be lower if fiscal policy was more disciplined
Unless productivity improves or fiscal demand falls, there will remain upwards pressure on interest rates.
In relation to your next property move, consider the risks involved, and the value-gap
Many Long Property clients with established careers/ businesses and/ or growing families are looking to either get into the market or upgrade their homes right now…
Also with downward pressure on house prices, properties which may have previously felt out-of-reach may soon start feeling more attainable.
My advice (and this is general advice only) is to consider two things…
The risks involved:
- How are you placed taking on larger financial commitments right now, and have you factored in the possibility of higher interest rates?
- If you have to sell in order to buy, how stretched would you be if you didn’t get the sale result you were hoping for?
- If the upgrade involves building or renovating, can you absorb unexpected/ higher construction costs too?
- What stresses would you be imposing on your family by moving?
The value-gap:
- If your existing house is a 4 and you’re upgrading to a 9, and it’s a once-in-a-lifetime property/ opportunity, that’s one thing…
- But if your current home is a 7 and you’d only be moving to an 8, then the value-gap is obviously much smaller
Everyone feels differently about these things, but in my mind it’s the lower risk and larger value-gap scenarios where transactions are really starting to look more compelling.
Ultimately, the decision is deeply personal and should be approached with careful planning and professional advice.
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This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. Nothing on the Long Property website constitutes legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.
