Homebuyers and Investors should keep in mind a few things as we move towards the new year.
This year’s market has been turbulent. The cash rate began at a historic low of just 0.1% and ended up at its highest level in 10 years of 3.10%. The inflation rate is 7.3%, the highest it has been in 32 years. In these conditions, property prices plummeted, wiping out many gains made during a pandemic. Some states have seen more severe falls than others.
Many factors, including government pandemic expenditure, low unemployment, external economic conditions like the Ukraine War, and increased consumer purchases, caused this turmoil.
Will the turmoil continue in 2023? Here are some indicators that could provide some clues.
1. Cash Rate
The RBA is likely to continue raising rates in the near future. Westpac and ANZ, two big banks, expect rates to rise as high as 3.8%. Many economists predict that interest rates will peak in the next two years. However, some predict a decline to begin at the end or beginning of 2024. It’s still too early to predict with certainty what will happen.
2. Borrowing power
In 2023, the borrowing capacity will likely decline. The banks will assess the ability of borrowers to service their loans based on the assumption that interest rates will increase by 3%. If the lowest rates of interest are around 5%, banks will service borrowers based on buffer rates. The majority of first-time buyers will have to compromise on the size of their property, as their borrowing power is lower than in early 2022.
3. The refinance cliff or fixed-rate cliff
CoreLogic data indicates that many homeowners will have their fixed rates renegotiated in 2023. They are homeowners who bought their homes when the cash rate stood at 0.1% during the pandemic. These loans had a low fixed rate of 1.95% for up to three years. Most of them had a term of two years. If the peak period of fixed lending is April 2021 through December 2021, then many people will finish their specified time between April and Dec 2023 and switch to a variable interest rate of 5-6%. In Sydney, this could result in a monthly payment increase of up to $ 2,000. In states with lower interest rates, the monthly increase could range from $500 to $600. Many borrowers may seek out brokers and professionals to discuss refinancing options.
4. Unemployment rate
Most economists predict a relatively modest increase in unemployment. RBA expects unemployment to remain around 3.5% through mid-2023 before increasing to 4.25% at the end of 2024. Deutsche Bank forecasts unemployment to be 4.5% at the end of 2023. If you are interested in the property market, it is important to talk to your employer about the future of their employment.
5. Overseas Migration
In 2023, it is expected that many workers and students will arrive in Australia due to the opening of the borders. The rental market would be affected. The already stressed rental market will require more rooms to rent. Rents could rise further. Rents could increase, which would be a positive.
6. Property Prices
Sydney and Melbourne will likely fall further than other markets. Further increases in cash rates are expected to occur in 2023. This will put additional downward pressure on the price of property. We are now seeing a slowdown in the decline of the property market. Some cities like Adelaide and Brisbane are beginning to show signs that they are nearing the end of the downturn. However, any further increases in interest rates could accelerate the decline. The property market will hit its lowest point at different times in each city. It is important to monitor your local market and determine the best time to buy.
