2023 hasn’t been all sunshine and roses so far, but we can start the new financial year with some cautious optimism.
While there is still uncertainty, there are positive signs moving forward, including the return of property price growth and the potential for a slowdown in interest rate rises, with the widespread belief that inflation has peaked. Let’s look into our crystal ball and take a closer look at what could lie ahead for the second half of 2023. What are our new financial year property predictions?
How much higher can interest rates go?
Everyone wants to know when interest rates will stop increasing and if and when they will fall. In this rate tightening cycle, we have seen the cash rate rise 12 times since May 2022 to reach 4.10 per cent, the highest since April 2012. Interest rate increases to date have seen basic variable rates for most banks creep into the sixes.
Not only are borrowers paying more in repayments each month, but their borrowing capacity has also fallen, with recent RateCity data suggesting the maximum borrowing capacity for the average family – on a combined annual income of $143,221 before tax – has shrunk by $247,700 compared to April last year.
The reality is that there could be a few more rate rises ahead because while inflation has peaked, it is still too high.
RBA governor Philip Lowe has indicated some further tightening of monetary policy may be required to ensure inflation returns to its target of two to three per cent within a “reasonable timeframe”. However, he said it will depend on how the economy and inflation evolve.
“The Board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market,” said Lowe.
Following the most recently announced cash rate rise, many major banks had increased their predictions for the peak to 4.35 per cent, with at least one more 0.25 per cent hike to come over the next few months – in July or August. NAB is the only major bank to have predicted a peak in the cash rate of 4.6 per cent.
At this stage, many also expect rates to start falling next year.
The economy is one of the most significant question marks.
As the RBA has indicated, the economy is one of the most significant X- factors. There has been an economic slowdown, with a slowing of growth and an easing in labour market conditions despite still being tight, with the unemployment rate rising slightly to 3.7 per cent in April.
Australia’s economy is doing well compared to countries overseas, where there is talk of recessions, with the global economy expected to grow below average over the next few years.
Risky debt is down, and savings are substantial.
Some people are struggling to make ends meet as the cost of living rises, but the reassuring news is that many households have substantial savings buffers, helping maintain low mortgage arrears.
According to Rate City, offset balances reached a record high in the March quarter, with the total amount being $246.24 billion, up $2.19 billion from the previous quarter, despite a slowing in offset balances since the June quarter of 2022.
For those with savings, the good news is that savings rates are climbing as interest rates rise, with some in the four per cent range and even into five per cent, with the top rate being 5.5 per cent with ING at the time of writing.
RateCity also found the value of new home loans with risky levels of debt had fallen, with APRA data revealing just 7.5 per cent of new owner-occupier and investor loans had a debt-to-income ratio of six times or more in the March quarter – the level considered risky by APRA – which was the lowest level since March 2019.
This number was down from 11 per cent in the previous quarter and well below the peak of 24.3 per cent in the December 2021 quarter.
House prices are rebounding.
The latest CoreLogic Home Value Index found residential property prices are on an upswing, with the third consecutive rise in May of 1.2 per cent, following a 0.6 per cent rise in March and a 0.5 per cent increase in April.
The rebound is the result of a fundamental imbalance between supply and demand, particularly with low sales listings throughout the region. Buyers, who are growing in number, particularly with the return of overseas migration – are competing for what is on the market, pushing prices back up.
While some measures are being implemented to address supply, it will take a lot of work, and a drop in new construction will compound the supply issue.
The latest data shows new dwelling approvals fell by 8.1 per cent in April, reaching the lowest level since April 2012. Property prices in all cities except Perth are still well below recent peaks, so it’s a great time to buy in early before price growth gathers too much momentum.
The traditionally busy Spring selling season could see more properties on the market. However, affordability is an issue, particularly if rate rises continue, so prices aren’t expected to see the enormous growth we saw in the most recent boom.
Either way, a rebound in house prices is good for existing property owners, and it also gives buyers confidence that their investment will be solid.
Rents are still on the rise.
The latest CoreLogic data found rents had increased by 9.9 per cent nationally over the year to May, dipping below double digits for the first time in 10 months due to a softening in the monthly growth rate, with rents up 0.8 per cent in May compared to 0.9 per cent and one per cent in April and March respectively.
With an ongoing demand/supply imbalance – and growing demand with a return of overseas migration – it is expected rents will continue to grow, which is positive for investors.
So how should you prepare for the new financial year?
It’s essential to conduct a financial health check every year to ensure you’re in the best financial position possible, on top of your budget, getting the best mortgage rates and other regular bills such as insurance.
The cost of living is rising, but if you can save, it’s crucial to have a buffer for the unexpected. While there is some doom and gloom, there are also opportunities and advantages to taking action. Others are sitting on the sidelines waiting to see what will happen, including buying property if you are in a position to do so.
