THERE will be more pain ahead for renters, first home buyers and borrowers in the residential property sector following the latest rate hike.
According to research and investment firm Braxton Chase, the interest rate rise is likely to trigger widespread rent increases as demand for residential property grows and landlords move to recoup added loan costs.
Braxton Chase estimates in order for landlords to cover increased loan costs in the wake of the latest 0.25% interest rate rise rents on properties worth $300,000 would need to increase by about 4.8% ($12 per week, assuming current weekly rent of $250); $500,00 properties up by 5.6% ($25 per week, assuming current weekly rent of $450); and properties worth $750,000 to rise by 6.2% ($40 per week, assuming current weekly rent of $650).
Braxton Chase’s chief executive Andrew Donnelly said although more principal buyers would be turned off by higher mortgage repayments, the market would still feel upward pressure from investor purchasers seizing better yield and capital growth opportunities.
“The interest rate rise isn’t great news for principal buyers, but it’s the latest in a series of positive developments for investors. The current climate of rising interest rates, tightening rental markets and land shortages continues to make the residential property market attractive to investors.
“Investors hungry for the double bonus of good yields and capital growth can do very well, provided they buy well-located stock and do their research,” he added.
Donelley’s views were echoed by Colliers International’s residential managing director Grant Dearlove, who said investors were leading the charge towards resurging property investment despite rate rises.
“We are seeing more investors coming back into the market because of the volatility in the stock market and because they are able to secure good rental yields from those that are renting whilst they search for a home to buy or save for a deposit.” he said.
Dearlove said traditionally a rise in interest rates leads to a reduction in sales volumes in the short term but it would not have a lasting impact on the overall residential property market.
“The residential property market has too much momentum for it to be arrested by a quarter of a per cent interest rate rise. However, it is expected that there will be a slow down in sales volumes while people assess their personal positions.
“The sales activity normally slows for about one to two months before picking back up again,” he added.
Dearlove said historically, some of the biggest property price hikes have occurred when interest rates were at their highest.
“Our economy is so strong, and the price we pay for this prosperity is higher interest rates. Don’t think if you buy — the value of your assets will go backwards — the economy in
CB Richard Ellis’ research executive director for the Pacific Region Kevin Stanley said a further rate increase, most likely in the first quarter of next year, would be much more of a concern for the residential sector.
“The direction in which this is heading is the worrying thing, it may spook confidence in the residential market. Especially for Sydney and NSW, any ratcheting up of interest rates will slow the residential sector and push back a stronger, sustained recovery.”
Meanwhile, the Real Estate Institute of
Joyce said the extra $60 per month to meet average home loan repayments will push affordability to its lowest level since 1985.
“The increase will mean that 37.7% of median weekly family income will now be required to service the average new home loan, taken out by all home buyers, not just those buying their first home.
“This does not include people refinancing their homes. The other highest peak was in September and December 1989 when 36.4% was required to meet average loan repayments on new loans,” he continued.
Joyce said aspiring home buyers now need to have between $30,000 – $40,000 saved as a deposit just to get into the market and then they are confronted with trying to budget for a very sizeable proportion of their income for home loan repayments.
“It is little wonder that increasingly fewer young families have the economic resources to invest in their own home, resulting in enormous pressures on the rental market, extremely tight vacancy rates and increasing rents.
“This worsening problem is not just a case of aspiring home buyers being denied their hopes for home ownership. It is a fundamental social and economic problem which will have ramifications for years to come,” Joyce warned.
Australian Property Journal
