Issue 12 | Thursday 16 June 2022 | Interest Rates in Context
Hi Andrew Bell here with you in what the record books are telling us is going to be the coldest few days since 1904. I know so many people around the country have shut off or are limiting the use of their heating due to cost of living pressures, but let’s think also about the larger than ever homeless people who’ll have to brave this arctic, cold outdoors, more about that in a minute.
I have been inundated with requests for comments from various media houses in relation to rising interest rates and the impact it’s going to have on the real estate market. This particularly comes from the 0.5% increase last week by the RBA, which was the largest single increase in 22 years.
I would like to share a little bit of perspective with you on interest rates. Throughout the majority of my 45-year real estate career interest rates have always been in excess of 10%. In fact, I vividly remember a real estate boom where interest rates were at,13-14%, and of course, a period where interest rates rose to 18%. In more recent years interest rates were between 6-8%, and then the pandemic arrived in 2020. The Reserve Bank understandably was deeply concerned that the pandemic would kill economic activity altogether and responded by lowering the official interest rate to the lowest setting in Australian history. It saw housing loans at sub 2%. Well, these record low-interest rates sure did their job and stimulated the economy beyond expectations. The country went on a spending spree whether it was new cars, caravans, boats, holidays, home renovations, and of course real estate in general.
It was never going to be possible to keep interest rates at those record low settings and to have got two years of record lows was amazing. Throughout my career, one thing I have noticed is the Reserve Bank is slow to react. Slow to put interest rates down when needed, and slow to put them up. Their official position is to keep inflation between 2 – 3% which is our ideal setting to encourage good economic activity.
Lower interest rates were always going to stimulate the economy and feed through to inflation. I find it difficult to believe that the Reserve Bank didn’t see that we were going to be facing increases in inflation from as late as last year when we started to see costs of living rising. We started to see the early signs of a shortage of goods. But by January of this year, it was obvious that the floods were having a huge effect on food supply and that the pandemic had created a significant shortage of many products used to measure inflation. It was obvious that inflation was going to burst out. Add to that the Ukrainian crisis and fuel shortages and no surprise that inflation could get to 8% before being brought under control.
So as usual as opposed to some modest interest rate rises being introduced late last year and early this year, we have had to slam on the brakes by sharp jumps in interest rate,s, and usually, the sharp jumps go beyond what is necessary. Interesting to hear that there is now some speculation as to when the Ukrainian War will be over and fuel supplies get back to normal, we will start to see fuel costs drop, as farmers are replanting crops that within a year or so will start to see some easing off in produce costs and we might actually be in a position to see interest rates brought down within 18 months or so. Only time will tell.
The perspective I am talking about is that if we do get the 2.5% predicted increase in the RBA’s official rate that the housing lending rate will be up around 4.5 – 5%. Yes, a doubling of where they were 2 months ago, but in relation to where interest rates have been, not only in recent years but
historically, they will still be incredibly low. But of course, the media is always looking for those sensational headlines that will continue to make us all feel that we are in dire straits. Having said that, it is true that there will be many that will suffer due to higher interest rates. There are many within our community that will find it very difficult over the next couple of years. Sadly, disproportionately is our low-income earners that will be hit the hardest. Also, the group of people that have bought in the last 2 years and borrowed to their absolute maximum. We are now seeing reports coming through about housing stress and how housing defaults are rising rapidly, but again as a proportion of the total number of borrowers, it’s a small percentage. There is a huge proportion of Australians who own their home outright. There is also now, particularly over the last two years, a very large proportion of Australians who have been paying their homes off rapidly, resulting in a huge buffer.
So yes, interest rates are going to rapidly increase. Yes, it’s going to affect a proportion of Australians. Yes, it will reduce demand for real estate, not only by some people being scared off to buy but because their borrowing capacity is reduced and they won’t be able to buy the homes of their choice, however, there are significantly more factors that come into play when determining how interest rates will impact the market. I will touch on that in my next report. But, remember this, the worst time for buyers to try and buy was the past 18 months. Incredible degrees of competition, rapidly rising real estate prices, the frustration and disappointment of learning a property was for sale and then learning it sold to someone else. Now we have a far more balanced market, and it’s the ideal time for buyers to purchase. Competition is not quite as strong, sellers’ expectations are not as high on price, and with interest rates on the way up the sooner you buy you can lock in fixed rates to avoid the higher home loan rates that will be with us in the next couple of rates. No wonder we have just experienced the second-largest surge in sales over the past 2 weeks that we have seen in the past two years.
Last, but most importantly, I go for a brisk 11km walk every morning along the Esplanade on the Gold Coast. Two years ago I might have seen one or two homeless people, but now I see them everywhere. Yes, single people but also now people of all ages. I see people who undoubtedly were in a stable environment two years ago that are now homeless, out in what is record low temperatures. I have seen mothers with their kids sleeping in cars. I see people trying to get shelter around toilets and open picnic tables and it just breaks my heart. So, for the third year, I am participating in the CEO Sleepout, and I am just reaching out to you and asking for a little compassion. I am trying to raise $15,000 that will go directly into feeding and providing shelter to our homeless people. I was hoping that I could find 200 people that might be generous enough to donate $50. I have already donated $5000 myself, but if collectively we could take that to $15,000 together with the other donations of other participants that would make a huge difference to our homeless.
Lots more to share with you as I know people are clambering for more information about what’s happening in the marketplace, and I will keep rolling that out moving forward. Stay safe and stay warm.
Andrew Bell, OAM
Chief Executive Officer
The Ray White Surfers Paradise Group
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