Reserve Bank of Australia has increased the cash rate by 25 basis points to 2.85%, marking the seventh consecutive monthly rate increase. RBA will keep raising rates until inflation is brought under control. The RBA is expected to keep it up until it puts a lid on persistently high and rising inflation. Housing values continue to decline and are likely to do so until interest rates drop. Many investors wonder if they should invest now or wait. We will look at some of the factors that could be indicators of how the market might trend and what they may signal to potential investors.
Prices of property are falling.
CoreLogic’s Home Value Index shows that national housing values decreased further (-1,2%) in October. However, the rate of decline nationwide has slowed down from -1.6% last August. Darwin was the sole capital city that had not seen housing values trend downward until October. However, it saw a fall of -0.8% in October. Housing values in capital cities are declining faster than unit prices – by -1.2% versus -0.7%, respectively.
Tim Lawless, CoreLogic’s research director, said that it is probably too early to declare the end of the worst part of the decline phase. We could also see the rate accelerate as interest rates continue to rise and household budgets become more stretched. Due to the fall in prices, buyers are now more likely to be favored than sellers. Investors can seize this opportunity if they are able to afford repayments under the current conditions of rising interest rates.
Rental growth despite record-low vacancy rates
The rental market is the most difficult it has ever been for tenants, as vacancy rates have fallen to record-low levels.
In October, the national vacancy rate fell to 0.8%. This is almost half what they were at the same point last year. Rents have risen as a result. Rents in October rose 0.6% nationally, with unit rents rising by 1.1% and house rents increasing by 0.5%. Rents are rising in most capital cities. This is why people are moving to more affordable options like units. Rents are still growing, but the rental growth rate has slowed.
This slowdown is not surprising, given that vacancy rates are so low and the demand for rental properties has increased due to migration from abroad. Lawless suggested that this could be a sign of renters reaching their affordability limit and looking for cheaper options. Home Loan Experts’ founder, Otto Dargan, said that in these conditions, with rising rents, interest rates, and falling property prices, investors are more likely to be able to afford to purchase than potential owner-occupier purchasers. This is because interest paid on investments can be deducted from tax, which means rising rates don’t affect investors nearly as much as they do owner-occupier purchasers. Some investors may think that now is the right time to buy a property.
Rents are rising.
Investors use gross yields as a way to assess the profit they make from their investments and compare rental income. A higher rental yield will result in a larger cash flow.
Gross rental yields are currently on an upward trajectory. This is attracting experienced investors while competition is low. Gross profits in capital cities (3.43%) have reached their highest level since Nov 2020, after rising 47 basis points since February 2022’s record low. Rent yields are on the rise, and house prices have fallen sharply, which is a great opportunity for investors. Some homebuyers even bought an investment property rather than a house to help with repayments. Then, they can return when they are able to.
However, expensive properties have become more affordable. CoreLogic reports that prices of houses and apartments in the most expensive suburbs fell 6.2% from their peak in April. Some investors will buy a property that is a good investment, while others wait to see what happens.
The Clearance Rates of Auctions are falling steadily
The auction clearance rates are a good indicator of market conditions. To give you a rough idea:
- Prices are rising quickly, and the market is a seller’s market.
- Market equilibrium is between 50% and 65%
- Prices are falling, and it’s a buyers’ market.
If the auction clearance rate changes in either direction or any order, we know that the market is changing.
In the second week in November, for example, the combined capitals registered a clearance of 57.6%. This was 1.4 points less than the clearance rate of the previous week. According to our best estimate, the market appears fairly balanced, but it is rapidly shifting in favor of buyers. The constant fall in clearance rates shows that sellers are beginning to accept the market reality and reducing their prices amid rising interest rates and falling home values. Dargan believes that when clearance rates cease to fall, it can be an indication of the right time to buy. This is a sign that the markets have reached a bottom.
He says that “most people miss two things.” The changes in the auction clearing rate are a good indicator of the changing market. If the clearance rate falls by a smaller amount each week, this may indicate that the best time to purchase is approaching. The second is that there’s a delay in the price reaching its lowest point and the auction clearance rate.
Note: In capital cities with few auctions (such as Perth, Hobart, and Darwin), caution is advised as there may be insufficient data to make an informed decision. Sydney and Melbourne, on the other hand, have more auctions than any other capital city, meaning that there is enough information to make an informed decision.
Other Major Factors To Consider
The Ripple Effect
The ripple is a key factor that determines the direction of the real estate market. It describes the way in which price increases spread from the high-end areas of inner cities to the surrounding areas. The ripple effect describes how changes in price in one place can apply outwards, affecting prices in nearby areas.
Investors with experience can learn a lot by observing the markets, which are usually first movers. Dargan says that these suburbs are typically the most expensive in Sydney. These suburbs are home to the 25th most expensive houses. These suburbs are the “canary in a coal mine” of the Sydney real estate market. As prices in these areas rise or fall, they spread to other suburbs, capital cities, and regions. It may be a great time to purchase in the outer suburbs when the price of the expensive suburbs is rising.
Note: It is important to be cautious because other factors may also play a role in causing different areas to behave differently. There may be a mining rush in Western Australia that causes certain areas to behave differently.
The direction of interest rates
Increased rates of interest put pressure on homebuyers and homeowners and, in general, lead to a fall in the value of property. Home prices will likely stabilize soon when the RBA stops raising interest rates. There may be another delay, as it takes time to see the effect of interest rate changes on the market. Dargan says that when the RBA, economists, and other experts see inflation as under control, they tend to change their outlook. They often start talking about interest rate drops. It is at this time that experienced investors will usually choose to purchase because they can get the best home prices possible and could soon benefit from lower rates.
It is more risky to buy a home when rates are high because the economy could change, and rates might not drop. The buyer must also have a good income in order to qualify for the loan.
Pattern of Crisis
A crisis can strike at any moment, and it is often the one that no one sees that changes the direction of markets. Dargan pointed to a pattern in the real estate market that was evident when the Global Financial Crisis as well as the COVID-19 pandemic took place. First, the crisis is denied. Then, people begin to fear that the property market may drop slightly. They delay selling their homes. Then, central banks lower rates, and governments increase spending. Property prices then rise quickly as a result of the stimulus, causing a boom in the property market.
Investors with experience tend to buy during the stage of fear or stimulation when prices are low and interest rates are low. They then profit from rising prices. Fixed rates are often lacking, so investors lock in the rate for five years.
Note: There is no guarantee that future crises are going to follow the same pattern. In a time of crisis, it’s crucial to seek financial advice and take into account the risk involved when investing. The information provided above is general and shouldn’t be construed as tailored advice.
How Can An Investor Stay Ahead Of The Trends?
- Keep an eye on the factors above.
- When the time is right, be ready to purchase approval.
- Continue to visit open houses, as you may find new opportunities.
- Consider your risk tolerance and seek financial advice.
- You shouldn’t expect the lowest price on the market. A few cents above it will do.