Ep 22. How will interest rates affect property prices
Interest rate rises - they’re the hot topic right now. In this episode, Michelle chats about the RBA rate rise, and what this means for the market.
Here’s what you’ll learn from today’s episode:
Why it’s important to do your own due diligence
How will the increase in the RBA cash rate affect your mortgage
Will you be able to grab a bargain?
What to look out for in a buyers market
Should you wait to try and buy a property?
Speakers in today’s episode:
Michelle May - Michelle May Buyers Agents
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Please note that any views or opinions presented in this podcast are solely those of the speakers, and do not necessarily represent those of any business. These views and opinions are general in nature, and do not take account of your personal objectives, financial situation and needs. Please consider whether it applies in your circumstances and seek professional advice wherever appropriate.
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Ep 22 - How Interest Rates Will Affect Property Prices
Hi, and welcome to the Buy Your Side, the property podcast that will help you make smarter property buying decisions. My name is Michelle May and I am your host today. Now, today, I wanted to dive into what is on everybody's lips at the moment: interest rates and what are they going to do to the property market?
Not only interest rates, but we've also got a small thing called an election coming up, and of course the world's state of affairs that's on everybody's mind as well. So I get asked this question every day by clients and pretty much anyone who knows what I do for a living, whether it's the girl in the supermarket or the dog walker in the park.
So why don't we dedicate an episode to this today? Hopefully my 2 cents worth will help you crystallise a little bit more about what it is that you are going to be doing. So of course the property market swings in roundabouts, right? We have been here before, although it has been 10 years since the last interest rate rise, but obviously we are coming off the lowest base rate in history.
So whilst interest rates are going up, they are going up at a very slow pace and we are still well below what's been an average for a very long time. Now, when you go to a broker or to a bank to talk about what it is that you can borrow, they will automatically already factor in interest rates rises.
So there is a buffer there that they calculate in to ensure that obviously with any fluctuations in those rates, that you will still be able to repay them. And I think it is always prudent to, for yourself, to add in an extra buffer over and above beyond that. So as long as you do that and be conservative with your numbers, you should be okay with the projections that are coming ahead. Now, the AFR did an article recently about what these changes in rate would do to a typical mortgage repayment. So I want to run you through some numbers really quickly. For example, for a typical $1 million home loan for an owner occupier who's paying principal and interest with 25 years remaining with a current average variable rate of 2.92%. If the RBA cash rate increases by 1% by December of this year, for example, the increase in monthly repayment is $473.
So that's a full 1% RBA cash rate by December. If, as some banks have been projecting, the RBA cash rate gets to 3.4% by 2023, so next year, that could mean a monthly mortgage repayment increase of $1,833. So that is a significant increase on a $1 million home loan. So now $1 million is a lot of money, but in the real estate world, as you know, if you've been looking around, particularly in Sydney, it doesn't buy you a whole lot.
So obviously this is just a bare bones kind of equation, but you've got to bear that in mind. So, be conservative when it comes to your assessment of what it is that you can afford moving forward. What it actually means to supply and demand in markets where interest rates are increasing. So we're just coming off a period of time where obviously, vendors were like the cats that got the cream because suburb records were being set almost on a weekly basis. So since COVID started, prices have been increasing at the fastest rate ever, in some cases 25 to 30% over the space of 18 months to 2 years.
And what we saw was that there were plenty of vendors wanting to cash in on that. They thought, well, I hadn't really thought about selling before, but my neighbour got such a crazy amount…I'm just going to take a punt. So that was happening towards the end of last year and the beginning of this year. We really saw an increase in supply, which was great for buyers because they were simply getting more choice. But, the buyer pool was also very deep. There was a lot of competition and so you really had to fight off 10 to 15 other buyers at auction on a regular basis. And everything was also running to auction. There were very few vendors who were prepared to take an offer prior to auction because they knew that competition was fierce. And even if, as a buyer, you succeeded to buy prior to auction, you would have had to pay a premium for that. Now the tables have turned. Yay. It's about time buyers got to look in. Because vendors are realising that, hey, the clearance rates have changed dramatically. Vendors are not getting the prices they want by and large and there is much more of a segmentation in the market happening, right now. And by that, I mean, that buyers are much more discerning about the quality of the property that they're looking at. So where previously everything and anything was selling, I mean, to put it plainly a polished turd was selling for crazy money, right?
There were properties on sale that nobody should have bought ever, and yet they were transacting with fierce competition. Now buyers have taken the rose tinted glasses off. First of all, there's fewer buyers in the market because a lot of them are now holding off, waiting for those prices to come crashing down and have left the market altogether and they're jittery. So there's less competition. But those buyers that are still in the market have gone, hmm…is this actually worth what they're asking for? Is it actually a property that suits my needs for the long-term at that price? So what we're seeing with these auction clearance rates that are being published, and even the emails that we get on a daily basis with the results from agents who go to other agents auctions and report what happens there, which is very, very insightful for us as buyer's agents so we keep track of that. What we're seeing is the amount of property that has been withdrawn from the market or passed in at auction or sold prior to auction has increased dramatically. So, the true clearance rates are well below 50% now - auction clearance rates.
So that means that it has changed from a vendor market to a buyer's market by and large for the market as a whole. But like I said, there is segmentation in that market. So when we look at property as buyer's agents, we score the properties on behalf of our clients independently, looking at its capital growth potential and that is basically evaluating the property in the cold light of day. So how good is this property? Irrespective of the client's brief. How good is this property in terms of its micro? So the property itself, does it have a good floor plan? Does it have good internal light? Is it private? Does it have period features? All those kinds of things. And the macro. So how good is the location? The suburb? Is there a walkability to parks and amenities? What about public transport? All that kind of stuff. So we evaluate properties like this and we score them just to give the clients comfort around the fact that yes, it's a property that meets all their needs, but it is actually also a very good investment.
So if you look at these properties, you can basically give them a scorecard, right? Just like at school, A, B or C. So those A performers, those really good quality properties that are beautifully finished, have a great floor plan, are just very attractive in great locations. Those types of properties are still commanding a good price.
You still have to pay a fair price for them and there will be competition at auction if the agent decides to run it to auction. But it's not going to be the 10 toi 15 people as maybe three, four months ago, it may just be 5 or less. So therefore the results of those prices are going to come in far more reasonable and much more in line with what is a fair price to pay and probably the agents guide as well as opposed to results that are 20, 30% over the guide.
But what we're seeing with the B and C type properties that are floored, somewhat, so the B type properties are usually the ones that are good properties, but they need a little bit of help. So maybe they need a renovation or improvement in floor plan or potentially they can come into that A type property. And then there's the C performers, which are really the properties that you shouldn't be buying at all. They are on main roads, very narrow, have no internal light. Those are the ones that we're seeing that are coming on the market, where the vendors having a crack and trying to offload it, they've really missed the boat. They should've put them on the market three months ago and gotten a good price and moved on. But those are the types of properties that are really struggling. And they are also the type of properties that are now dropping in price so, when they're saying the media is reporting price drops or projecting price drops, you've got to really take that information and break it down and go, okay, well, what property am I dealing with? Is this an A type property? Or is it a C type property? Am I going to pick up a bargain here because those bargains that have dropped the most in price are probably compromised in such a way that you are going to be paying the price further down the track as well. You always make your money when you buy the property. And I'm a firm believer that the way you make your money is by picking the quality. It's not just about the dollar value that you pay on the day. It's about the quality and that enduring quality will stand you in good stead for the future, because if there is capital growth to be had in the future, and it will happen again, of course the market will come up again, that's when you're going to make more money than everyone else.
So if you're nervous about getting in the market now, because of interest rates and everything else, obviously make sure that you've done your calculations, but I think it would be a mistake to wait to see how far the market is going to drop as a whole, if there is going to be drops because that's speculation and you can win and you can lose. And what about all those people who at the beginning of COVID said, oh we're going to wait because the media says the market's going to drop 30%. Boy, were they wrong, right?
I'm expecting there to be a correction in the market, but not to the tune of 30%. I really don't think so. And I also think that looking to buy a property it's about you and your life and what you're looking to achieve with that. It's your home. You want to find the best possible property for you and your potential partner or family or whatever the case may be, or just you yourself needs to meet your needs and what if you wait, say 6 months and then the right property doesn't come along, right? And then the market changes again and you've just wasted 6 months of your life. So I think if you are financed or ready to go, you're comfortable with your current situation. You're comfortable with factoring those interest rate rises and you see the right property on the market now, then do your due diligence, do your research, talk to your broker or your bank, make sure you can afford it and go for it. Maybe get some advice around strategy from a buyers agent or whatever the case may be, but obviously make sure you pay the right price for it, but don't wait, don't wait.
If you find the right one and you've done all your research and you're comfortable, don't wait for prices to drop further because the one thing that what you will always see this happens, it's happened before, is that supply will dry up and the market is going to return to the natural state of the market as they call it. That means that only people who need to sell and need to buy will do that. So we're talking deaths, divorces, empty-nesters, downsizers and people who are having children who need to upgrade and upsize. So the whole, let's transact for the sake of making money, which is what's happening for the last 18 months or a year is not going to happen anymore because people realise actually there's not the crazy gains to be had. So unless people are getting divorced, someone dies, having a baby or downsizes like I said, those properties are not coming on the market. So the supply is going to be much smaller. And I'm already hearing that from agents because they're struggling to get new stock on the market. The heyday of them having 10 or 20 properties on at any one time is not happening anymore. They're having to work a lot harder to get that stock on the market because vendors are not really looking to move anymore unless they have to. So be mindful of that. The months ahead, there is going to be less choice available and more is going to be happening off market as well. Agents will be testing the waters first with buyers already on their books or with buyers agents in particular with vendors who are a little bit nervous because they may not get the result they need to make those moves in their lives, so they might choose to hold onto the property unless they get the result that the agent can give them.
So if you are in the market, make sure that you sign up to every agent's mailing list. You're going to be inundated with emails and phone calls no doubt. But if you're serious about getting in the market, you might need to make sure that you explore all the avenues of finding and uncovering properties as well.
And I would also say be proactive in that sense if you have seen a property in a particular location, like an apartment in a particular building that was sold by a particular agent, contact them and say, Hey, I'm in the market. This is my budget. I know you sold this one. I am after something very similar. What have you got? Because then they can go door knocking on your behalf and go listen, I've got a buyer who's looking in your building on your street. Would you consider selling if I get them through?
So think about being proactive in that sense, but whatever the market is doing, don't forget it is always changing. As long as you're financed and ready to go, you've done your calculations, you've got comfort around that. When the right property comes along, regardless of what the market is doing, just go for it. Just be sure in the research that you've done and go for it. And then once you've purchased, you get on with your life. How good is that?
Alright. I hope that was helpful. Give me a follow on Apple or Spotify or wherever you find your podcasts, because then every time I upload a new episode, you'll get notified. We're also on Facebook and Instagram, just hiit follow. We'd love to keep you updated with everything that's going on in the market.
And if you've got a question, please drop me a line at hello@buyyourside.com.au. I'd love to hear from you.
Until next time thanks for listening. Bye!