8 November 2023

Rate rise to squeeze ACT's tightening rental market from both sides

| Ian Bushnell
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Homeowners who bought second-hand apartments in the past three to five years may be in trouble. Photo: Region.

Today’s interest rate rise will start to put pressure on Canberra’s tightening rental market as potential first-home buyers hold off from purchasing a home and some homeowners decide they can’t afford to hang on anymore.

The Reserve Bank raised the cash rate by 0.25 per cent, taking the benchmark interest rate to 4.35 per cent and adding about $76 a month to repayments on a $500,000 home loan.

Monthly mortgage costs are up more than $1200 on that kind of loan since the RBA started its campaign to rein in inflation in May last year, and interest rates are now at the highest level since November 2011.

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The Property Collective’s Will Honey said that while the Canberra market had already factored in an increase, there would be pain for homeowners, especially those who had bought second-hand apartments in the last three or four years, and implications for the rental market.

Mr Honey said those apartment owners were already feeling the pinch with increasing rates and another one was not going to help.

“Interest rates are going up and vacancy rates are starting to come the other way,” he said.

“This increase is going to put even more pressure on the vacancy rate as people who won’t be able to afford to buy stay in the rental market or homeowners sell and have to go into the rental market.

“This will put more pressure on rents.”

Ironically, that will feed back into inflation.

Mr Honey said another rate rise after this one would make for an interesting start to 2024.

“It’s not going to be too good for our market,” he said.

Without any increases, the Canberra market was looking forward to a promising New Year.

The saving grace for those buyers who can adjust their borrowing budget is that the rate rise could keep prices down, something that was in the mind of new Reserve Bank Governor Michele Bullock, who noted in her official statement that housing prices were continuing to rise across the country.

Mr Honey said the spring had been a patchy affair in Canberra apart from the high end of the market where several records had been broken.

He agreed that with more choice available and seller expectations realistic, the market was slightly in favour of buyers.

“The heat of the market isn’t there,” Mr Honey said. “The high market hangover is over.”

Headshot of woman

Reserve Bank Governor Michele Bullock: the board is resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome. Photo: RBA.

Ms Bullock said in her statement that inflation was still too high and proving more persistent than expected a few months ago.

“The latest reading on CPI inflation indicates that while goods price inflation has eased further, the prices of many services are continuing to rise briskly,” she said.

“While the central forecast is for CPI inflation to continue to decline, progress looks to be slower than earlier expected.

“CPI inflation is now expected to be around 3.5 per cent by the end of 2024 and at the top of the target range of 2 to 3 per cent by the end of 2025. The board judged an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe.”

But the increase has divided economists, with many saying it was unnecessary and would not achieve what it set out to do.

Deloitte Access Economics partner Stephen Smith said it was the rate rise Australia didn’t need to have.

“With a slowing economy, supply-driven inflation, a more volatile geopolitical and global economic outlook, and past rate rises still to take full effect, mortgage holders and businesses seeking capital to invest will pay the price today,” he said.

Although the September quarter consumer price index print came in slightly above consensus forecasts, there isn’t enough evidence to suggest the uptick in inflation is here to stay or that lifting interest rates is the right way to fix the problem.”

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Mr Smith said recent inflation had been driven by specific factors like higher global oil prices and rents rather than broad spending pressures.

“With increases to the cash rate only effective at reducing demand-led inflation, it is hard to see what a November rate hike achieves other than making it harder for Australians to pay their mortgage in the lead-up to Christmas,” he said.

But Ms Bullock said the board remained resolute in its determination to return inflation to target and would do what is necessary to achieve that outcome.

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I heard Albanese is planning to visit Australia to help sort this out

Property investment advisors (who don’t have a vested Canberra interest) continue to advise against Canberra property investment due to high costs of ownership through heavy property taxes and strata fees, heavily regulated ACT government rent controls and little canberra property value growth outside the higher end of the market.

Mr Barr and Mr Rattenbury need to be careful to ensure that they provide adequate government housing intervention to replace declining investment by landlords at the low to mid rent end of the market.

We’ve had years of promises about increased ACT government housing when in fact our government has actually reduced dwelling numbers.

devils_advocate2:16 pm 08 Nov 23

Blaming interest rate policy for housing (un)affordability is ridiculous.

Interest rates of 7% or more would not even warrant a mention if house prices were not so ridiculous.

The price of houses is due to state and territory land release, regulatory and tax policies. Trying to keep the price of money (interest rates)artificially low to enable people to borrow increasingly larger amounts to buy stupidly overpriced houses is idiocy.

At this point, I really would just like to remind people that they have no right to complain, given that they voted for and will absolutely continue to vote for the nincompoops who created the (totally avoidable) conditions behind the cost of living crisis. Whether it’s the Libs, Nats, Greens, Labor or some Green leaning independent teal, the electorate just hasn’t put in the effort that’s needed to know not to vote for these clowns.

Democracy works; you get what you vote for

I didn’t vote.

Inflation. Mostly caused by record profits from supermarkets, insurance industries, corporate real estate rents and a population that is growing faster than we can build new housing.
Push the interest rate up a notch and yet more money flows from renters and mortgagees into the pockets of shareholders and executives.

No, it was government pandemic policy that caused the current inflation:
This was a predictable and obvious consequence of artificially shutting down the economy for months.
Also with zero evidence that it contributed to saving anyone’s life:

Agree that partly fueled it. The homebuilder grants pushed it even further ahead. However the natural disasters from the previous years caused a rise in food costs that since then have come down significantly. Insurances have been making top dollar too though even with all natural disasters. Fuel prices are mostly up due to the ukraine war and the opec cartel limiting the supply.

Incidental Tourist10:05 am 08 Nov 23

The elephant in the room is fleeing residential property investors and sharp downturn of new construction activities even before interest rates peaked. Ironically ACT Government is right when saying that no more new land releases are needed because the new housing market is saturated. So we are facing perfect storm of high and growing residential taxes, draconian anti-landlord regulations, raising interest rates, growing construction costs, fleeing investors, and increasing population.

GrumpyGrandpa9:04 am 08 Nov 23

I’ve just read an article written by Mark Bouris, where he has given Albo a blast.

He says that the ALP intend to bring in 1.5 million immigrants over the next five years, which will require 800,000 additional dwelling.

Builders are going bust, mortgage repayments increasing and demand is pushing rents. Our son is paying $600 pw for an old 2-bedroom unit in Sydney (up from $480 eighteen months ago).

Albo needs to change direction. He needs to slow demand in our economy by cutting this huge immigration target and by taking money out of the economy by reducing government expenditure, rather than relying on the RBA to crank up interest rates to break the economy.

Bouris squarely lays blame Albo. The thing is, he’s only in charge of the Federal Government. The States and Territories are spending like drunkards as well and who has to pay back all of the debt? Us.

Don’t quote Bouris – he has zero credibility.

HiddenDragon7:57 pm 07 Nov 23

The denial about demand-driven (particularly through a rapid rate of immigration) inflation continues unabated – whether it’s “independent” commentators who are basically arguing for lower rates on their own mortgages, or a federal government and its one-trick Treasury which likes the way that galloping population growth makes its budget bottom line look better, but doesn’t want to face up to the broader costs.

The interest rates are doing what they predicted for the temperature.

We’re spending more higher welfare but getting no more enconomic return for the investment. More money in the lower end of town is pushing up prices. Uncertainty in the market is compounding the effect.

This is what happens when you buy votes rather than economic investment.

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