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Andrew Bell’s Market Wrap: A Closer Look at Interest Rates 

By Rebecca Coleman

Issue 04 | Thursday 24 February 2022 | A Closer Look at Interest Rates 

Hi! Andrew Bell here with you and this time we will be having a closer look into interest rates which is in the news so much today.

After years and years of stagnant inflation and usually below or at least in the lower levels of the Reserve Banks target levels of 2-3% we see CPI inflation for 2021 recorded at 3%. It is not as bad as the US at 6.2% but above the Reserve Banks range and so there is much speculation about interest rate rises.

In fact, banks have already factored in rising interest rates, and you will find most home loans today are a percent or more above the levels you could have obtained through the second half of 2021. They are not official interest rate rises they are just banks pre-empting what will happen this year.

The big question is whether this inflation outbreak is short term or long term. There are some factors that are driving prices higher at present with the much-reported supply shortages of goods from overseas and then delays in deliveries creating a shortage of goods and that always means prices increase. We know that we have had no immigration for the best part of two years with our borders closed and so it means there has been an acute shortage of labour and the normal supply of imported skills that come through immigration. That has resulted in employers offering higher amounts of wages to lure people to their businesses. So, some argue that as shipping gets back to normal and now that our borders are open that both of these factors will reset themselves and perhaps later this year inflation will start to drop. If that was the case there would be less pressure on the Reserve Bank to increase rates.

Yet there are others who would argue that higher interest rates are going to be with us regardless of the above factors. Factors such as the ever-rising fuel prices, particularly currently over the Ukraine issue but even before then that means our heavy importing of goods will see transport costs at higher levels and that feeding through to higher pricing for goods.

But the most likely big driver of inflation will be the huge debts both personally and by Governments right throughout the world. Covid has created a great deal of Government debt and low-interest rates have seen unprecedented borrowings for people to buy cars, boats, caravans, and indeed real estate. There are huge demands for Capital by banks and others to fund all of this borrowing and so there is going to be competition throughout the world for that capital which will drive the price of money up.

So, what is the likely outcome? Well, it is guesswork but what we are faced with already is that interest rates are higher than they were three months ago and are likely to go even higher. The Reserve Bank won’t make a move before the Federal Election and are unlikely until perhaps the middle of the year at the earliest. So, they have some time to assess how these varying factors are playing out in the marketplace and how they turn up in our CPI measures. Traditionally Reserve Banks don’t move on interest rate rises if only a modest adjustment is needed. They would be likely to do a 0.5% rise initially followed by maybe two 0.25% rises subsequently over a six-month period. They will then want to see what the response is in the marketplace. So if it is that official interest rates rise by 1% or so then a lot of that is already factored into the existing borrowing.

There is plenty of evidence that borrowers can handle a 1% increase. For some time now as a result of the Royal Commission the banks have had to ensure that borrowers can handle at least a 2% interest rate above what they initially borrowed. So in real terms, a 1% or so increase in interest rates shouldn’t have a big effect on the real estate market but my experience over +40 years in the industry what happens is that the media make a big song and dance about it and ultimately create fear in buyers minds and concerns in interest rates may go up 2%, 3%, or 4% and they tend to be a little nervous about buying in the market at all.

So I don’t think there should be any overly great concern about interest rates but irrespective largely because of the media it is likely to have a bit of a dampening effect on the real estate market in the second half of this year.

I also would love to invite you to our upcoming Sports meets Business Lunch on Friday 8th April. This is always a great fun day but also a really interesting one. We interview some of our leading business people with insights into what is happening particularly here on the Gold Coast in particular fields, together with some of our nation’s top sportspeople. It is always fascinating and a day of good humour, great comradery, and a great way to help raise funds for the Surfers Paradise Surf Club which carries out more rescues each year than any other club in the Country. You would really be helping save lives so if you can join us either yourself or put together a group of friends or work colleagues, we will look forward to accommodating you. Please contact our Events Coordinator via reply email & we will send forward more details to you.

Well, the last days of summer are here but we look forward to continuing robust activity here on the Gold Coast which has not only been great for our real estate market but great for our Gold Coast economy. The city is really buzzing and bubbling and we just love hearing the feedback from so many people who have moved here saying just how much they love it and wondering why they didn’t do it sooner. For all of those still intending to move this way make sure you reach out to us so we can help you well in advance as there remains a shortage of properties for sale but if you give yourself sufficient time it will take the stress out of your house hunting. We are here to help.

I look forward to being with you in a fortnight’s time.

Warm Regards,

Andrew Bell, OAM
Chief Executive Officer
The Ray White Surfers Paradise Group

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