Rates Rise Again – But Have Local Property Prices Already Adjusted?

The Reserve Bank has today increased the cash rate by another 0.25% to 4.60% — its highest level in 15 years.

There is no point sugar-coating it. This is another difficult blow for Australian households with mortgages, as well as businesses and investors carrying debt.

The bigger question is: why are we still here?

Inflation remains too high and the RBA is determined to bring it under control. Higher interest rates work by taking money out of household budgets, reducing spending and slowing demand across the economy.

Unfortunately, that medicine comes with side effects.

Mortgage holders have less to spend. Businesses face higher borrowing costs. Investment can slow. Employment conditions can weaken. And renters aren't necessarily insulated, with landlords also facing substantially higher finance and other ownership costs.

There are legitimate debates about how much of Australia's inflation problem is imported and how much is home-grown. Global energy prices have certainly played a role. But so too have domestic capacity constraints, weak productivity and strong demand.

Fiscal policy also forms part of the economic backdrop. Government spending remains at historically elevated levels and the Federal Budget continues to operate in deficit. At a time when monetary policy is attempting to take demand out of the economy, it is reasonable to question whether all arms of economic policy are pulling equally hard in the same direction.

Whatever your political view, the outcome for borrowers is the same: interest rates are higher and households are being asked to absorb the adjustment.

But what does this mean for property locally?

This is where we think the story becomes more interesting.

Across Helensburgh and Stanwell Park to Thirroul and Bulli, we have already experienced a considerable adjustment in buyer sentiment and property values.

Buyers are cautious. Borrowing capacity has reduced. Properties are generally taking longer to sell and unrealistic price expectations are being punished by the market.

However, from what we are seeing on the ground, there are signs that parts of our local market may be finding a floor.

That doesn't mean every property has stopped falling, nor does it mean prices are about to rise again.

It simply means that much of the interest-rate adjustment may already be reflected in the prices buyers are prepared to pay.

One important characteristic of our local market is that many homeowners appear to be in a relatively strong position. We are not seeing widespread financial distress or large numbers of owners being forced to sell.

That matters.

If owners don't need to sell, many will simply hold their property rather than accept a price significantly below their expectations. That can restrict the supply of quality homes coming onto the market and eventually create a level below which prices become increasingly difficult to push.

A message for buyers

For buyers, today's rate rise is another reason to be careful with borrowing and understand exactly what you can afford.

But we would also caution against sitting on the sidelines indefinitely, waiting for prices to keep falling.

Property markets rarely ring a bell when they reach the bottom.

If you find the right property, in the right location, at a price you can comfortably afford, waiting another six or 12 months purely because you expect it to be cheaper may not necessarily produce the result you expect.

The property may not fall further.

Your borrowing capacity may change.

Or another buyer may simply recognise the opportunity before you do.

Our view is that this is a market for considered buying, not fearful buying – but equally, not fearful waiting.

Buy well, negotiate hard, understand your finances and focus on the property you would be happy to own for the long term.

In our local market, that may prove far more important than trying to perfectly pick the bottom.