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2022 was definitely the year that flew! It’s been a big year at Cornus Developments with the completion of 2 projects we delivered homes to 83 new...
You can’t watch the news or look at your phone without hearing about inflation and rising interest rates. Speak to friends and family and everyone has an opinion on the current economic state. It’s currently dominating the news and trending globally, instilling fear in many people, especially first home buyers. In lieu of this, we wanted to undertake an in depth review of the current property market and compare it to the previous cycles, so you can make a well informed decision about your next step.
At the moment in Australia, we are facing increasingly high inflation rates at 5.1%. This problem, however, is not localised and felt globally with America suffering an 8.5% inflation rate. There are many contributing economic factors at play here but the main reason for the economic shift are; the global pandemic, the war in Ukraine- which has caused fuel prices to increase and global food shortages, low wage growth and an increase in excessive spending.
A 5.1% inflation rate means that your dollar holds less value than it did 12 months ago. In order to combat rising inflation rates, the RBA (Reserve Bank of Australia) raises the official cash rate and interest rates. Rising interest rates are implemented in order to decrease spending and deter the rising cost of commodities. The theory behind this steams back to basic economics principles, that when demand decreases price decreases and when demand increases price increases. How this economic theory works in practice, and in relation to inflation and rising interest rates, is that the demand for these items (such as property) decreases, therefore bringing down the price.
Last year the Australian property market experienced an unprecedented boom, which made an already high market even harder to enter. It’s not just its high barriers to entry that have caused an issue but a rising debt to income ratio, which is causing issues as many have paid too much for their property during the height of this boom. Raising the interest rates will lower demand as many people’s borrowing capacity will decrease and their debt to income ratio will be too high. It will also increase stock availability as many are looking to cash in on the current property prices and/or need to sell their property. The increase in interest rates combined with the high inflation rate (that has resulted in an increase in everyday living and essentials such as iceberg lettuce costing $13) is expected to minimise demand and deter borrowers.
Nothing lasts forever. The Australian property market has consistently seen growth, over the last 10 years your investment in the property market would have seen a stabilised 12.1% return on investment, which is higher than any other investment over the past 10 years.
International borders have also opened up which results in more tourists, foreign investors and migration and if the forecast modeling is correct, in Australia we can expect the population to grow by 22% over the next 20 years.
According to REIV (Real Estate Institute of Victoria), last week’s clearance rates were at 68% which is deemed a buyers market. This means if you have the means and the money to purchase, it’s a great time to capitalise on the opportunity. As mentioned earlier, the increase in interest rates is expected to cause a shift in demand which is evidently working, as clearance rates are only now at 68% which means that supply is outweighing the demand. It’s also a great time to purchase because in Australia we are experiencing a housing shortage which is causing rent prices to skyrocket and the availability of rental properties to diminish due to the high demand, so if you’re looking to invest now’s the time as there is such a high demand for rental properties. The rental shortage also drives up the price of rent, so whilst interest rates are rising there is more available property to choose from. Unlike when choosing a rental property, many don’t have the opportunity to pick and choose the home they would like to live in and many are subjected to steep rental hikes, without warning, with these hikes being higher than the interest rate rise.
It’s also a great time to buy due to the market stabilising and many people ‘waiting out’ to see what will happen in the market however, the property market is unpredictable and as we saw last year can rise at any time. Many economists warned that during the global pandemic, property prices were going to plummet by 20% but this wasn’t the case, once we started to recover from the pandemic, the property market increased by 23.7%. The global pandemic caused much economic uncertainty which resulted in market instability because of the unknown, unlike the interest rate rise, which has been predicted for much time since the woos of the pandemic. This is due to the RBA implementing low-interest rates to keep our economy at bay whilst we moved through uncharted waters. Now that the pandemic is over and the economy is recovering, the full effects are unraveling. This is not new territory as the property market follows a repetitive cycle that has historically been proven to recur, which is in short, that prices rise, then there is a lull where they stagnate or even decline and then they start to increase again.
If you’ve got property on your mind and are looking to purchase a new home or invest in the market, you can purchase a home with Cornus. We have a few remaining apartments in our recently completed Cornus La Frank project located in Burwood and our Cornus Woodlands project located in Malvern East. So, you can purchase in a stabilised market or you can wait out the interest rates rise and purchase an off-the-plan home in Oakleigh, Carnegie or Glen Iris now and save on stamp duty, lock in a low price and save more money whilst the project is getting built. Fill in the form below for any enquires and our sales staff will be in contact shortly.