Here we Go Again

I suppose I should be at least a little bit grateful to the RBA for once again providing me with an ever relevant topic at least once a month, but being in the same boat as many readers with a mortgage of my own, the gratitude does not go particularly far.

A further half a percent increase this week, and a new cash rate of 1.85%, with variable rate mortgages now firmly back in the 3s and inching into the 4s once again (depending on your circumstances). For those with short memories though, cast your minds back only 6 years ago and those rates were pretty common (or even keenly sought after!) I can certainly recall paying more on my first mortgage or two. Still hurts though.

The question that follows on (and one which I have been asked a number of times already this week) is what will now happen to property prices? If a mortgage is more expensive, then people won’t be able to borrow as much, and subsequently prices would have to drop, right?

If we had seen consecutive interest rate rises back in 2018 or 2019, when the local market had been pretty much static (bar a few jumps here and there), with balanced demand, then yes we would likely have seen a negative impact. Today however, we have a few insulating factors in place, whether or not they are a comfort remains debatable.

Firstly, we have enjoyed an extraordinary environment of tight supply and high demand for the past 2 years, with the number of properties available for sale at any one time dramatically reduced, while simultaneously everyone (or so it seemed sometimes) wanted to buy. Rising interest rates will take the edge of demand, but this is just likely to bring things more into an equilibrium in the short term, rather than upend the whole equation – there might not be AS MANY buyers per property, but there are still more people than properties in most market segments.

Secondly, as anyone that took out a mortgage lately would know, the hoops to borrow money have been higher and more numerous for some time now. Banks have built in buffers in assessing affordability (though these are being whittled away), which should minimise the number of potential defaults. As prices have risen, so too has equity, providing additional buffer.

Third, mortgages might be more expensive but so is renting. Few will see selling up to rent instead as being a safer bet in this market, keeping more people in their homes and supply tight for now.

Tom Quaid is the REIQ Zone Chair for Cairns