Issue 3 | Thursday 9 February 2023 | Let’s get interest rates in perspective
Hi Andrew Bell here, and I thought post The Event, which by the way produced the best sales results in the country through the early January period and continues to deliver more sales. No question it’s a different market to the previous couple of years, but having said that, it certainly showed that there was no lack of interest in buying property, just a more conservative view as to real estate values, and of course, that’s just usual. Every boom has been followed by a degree of price correction, but the big question is, how big will that price correction be.
The reason for the price correction is twofold. First, concerns about a slowing economy, and second, interest rates. The concern about the economy relates in particular to inflation and how Governments, Reserve Banks and industry will strategise around inflation that has broken out around the world. Of course, all economies are at different stages of inflation breaking out and those groupings respond to inflation. Interesting to see in the biggest economy in the world, the US, that inflation climbed to 6.5% in December, it was the sixth straight year after year slow down. We also see in other European economies that inflation is starting to ease, yet here in Australia, we are a little bit behind having risen later than other economies, and not surprisingly, haven’t’ quite yet peaked before starting to see interest rates ease, although, in areas such as fuel and food costs we are starting to see some drop in consumer prices.
All this will feed through into interest rates. We will continue to see some interest rate rises here until we see our inflation rate peak and then start subsiding. Lots of speculation as to when that will be, but fingers crossed it’s before mid-year. The Reserve Bank has that tricky situation of trying to control inflation but not wanting to have higher interest rates damage the economy, and so they won’t want to keep interest rates higher any longer than necessary.
Let’s get interest rates into perspective. Have a look at the graph below. This shows interest rates going back to the mid 1990s through to the last interest rate rise in December. This is showing the official Reserve Bank cash rate which is the basis by which Banks then add their margins for lending. If you listen to the media you would think that we are at record high interest rates, but they don’t show the perspective that this graph does for us to understand. We have just moved from out of emergency settings and back to a normal interest rate for a temporary period of time.
So, while interest rates are high the great majority of Australians will continue to have some hesitancy in the marketplace even though we still suffer with a greater number of buyers in the marketplace than there are properties for sale. What we will see is the meeting of minds between buyers and sellers at a level where buyers feel they are buying better than they could of a year or so ago, and sellers are still making good money because of the substantial increase in prices over the past 3 years. It’s just that many sellers won’t feel that they are winners, even though they are.
We will certainly like to see this scenario through most of 2023. It’s just a resetting of market values and something that will be a new setting for years to come, but we have other factors to take into consideration, and that is the return of immigration where we will see an extra 200,000 plus people arriving in the country, and this substantial drop in building numbers meaning an increase in demand for real estate and the diminishing supply. Another significant contributor to pricing in the real estate market.
It’s going to be a fascinating year. At the end of the day, Australians keep getting obsessed about real estate in terms of buying well and selling well, rather than focusing on buying a home that they really love to live in, that they raise their family in, and that most likely they will own the property for 8-10 years at least. Through that cycle, history tells us that it will do well. There is a huge demand for investment properties and they are delivering incredible yields at the moment. That is going to continue for quite some time to come as we have actually been going backward in the supply of rental properties. It has been the best environment in over 50 years for investors.
What we all have to be careful of is that we don’t allow this short-term period of time of higher interest rates to scare us into doing nothing. Look for the opportunities, yes make offers, and negotiate, but this is a brief period of time where buyers will have an improved environment to purchase in and they should take advantage of it.
Remember the graph above and remember that we are not in a high-interest rate environment, we are in a normal interest-rate environment and if we can get our head around that it will produce great opportunities for buyers and sellers alike.
A quick shout-out to let everyone know that we are now taking bookings for our Business Meets Sports Lunch on the 17 March. It’s a hugely fun day, very casual, and very entertaining. Some surprise leading sports identities will be interviewed as well as one of Australia’s wealthiest, and most fascinating personalities Bruce Mathieson whose liquor empire has resulted in him providing 1 in 2 drinks served in Australia every year. From a kid who left school at 13 to one of Australia’s most successful human beings, it’s a fascinating story. We had part one at last year’s lunch and by huge demand, Bruce is back to tell the second half of his story.
That’s it for this week and look forward to being back with you in a fortnight’s time.
Andrew Bell, OAM
Chief Executive Officer
The Ray White Surfers Paradise Group