Seven successive rate rises now after the RBA increased the cash rate to 2.85% this month. What's happening out there?

Seven successive rate rises now after the RBA increased the cash rate to 2.85% this month.

Westpac predicts a peak of 3.85% by March, and ANZ is pitching the same number but in May. NAB’s forecast is only 3.6% by March, while CBA is only expecting 3.10% by the end of the year and remain steady for the first half of 2023.

This proves my favourite saying regarding economics… “forecasting is a mug’s game”!! The economics teams being paid millions to do all that analysis probably have as much chance of getting it right as your random guess.?

So what’s actually happening out there? Mark Trayner shares his thoughts on the state of play!

Residential Property

Some of the pundits are predicting values will decline by as much as 20%, losing much of the gains made during the pandemic. But on the ground, there are definitely mixed signals, with some developers and agents seeming to still attract buyers at peak prices, while others have seen interest fall through the floor.

November’s rate hike is probably causing some borrowers’ budgets to be squeezed. When rates were at about 2%, the “assessment rate” (or “sensitivity rate”) was 5.25% - with home loans now getting close to that, combined with inflation causing rising living costs pressures versus their living expenses at the time of loan application, the buffer has probably disappeared for many.

But with unemployment at generational lows (and forecast to stay there), it’s unlikely that we’ll see blood on the streets.

Mortgage arrears en-masse generally only happen when people lose their jobs and can’t get another. For most people, if they still have a job, their lifestyles must be adjusted (perhaps significantly) on discretionary items. Maybe even non-discretionary items?(anyone else remember their parents only buying Home Brand groceries and super-tough cuts of meat when they were kids, and “eating out” only being for special occasions, at the RSL?).

There’s still good logic in buying resi property, though – as the old saying goes, “the money’s in the buying” – and the “FOMO market” of the pandemic made it the toughest time to buy. But now, being a buyer’s market again, you can negotiate – and sometimes hard!! Our recommendation is to engage a buyer’s agent (and we know the good ones, so ask us!), who are best placed to negotiate hard and bag a bargain.

Commercial & Industrial Property

There is plenty of chatter – buyers are sitting on their hands across most sectors while vendors are still expecting peak prices. But the obvious question being asked now, but investors is “why would I buy a property at a 5% yield when debt now costs at least 5% (and will probably rise further)?”.

Difficult to argue that, for most buyers who are using a reasonable amount of debt. Talk to a valuer (over a beer to get the honesty juices going), and they’ll admit their job is tougher than ever. There’s hardly any sales evidence. After all, transactions aren’t happening because few are incentivised enough to sell or buy.

The noticeable continued activity we ARE seeing in commercial & industrial is with owner-occupiers – who don’t focus on the rental yield but instead look at the “rent versus repayments” equation. In a high-inflationary environment, your rent will probably get pushed up a fair bit (unless you locked in fixed increases), so even with rising rates, buying can still make sense.

Bargains to be had? Blood in the street? Doesn’t seem so yet. But we reckon there’s a reasonable chance that some movement will happen in 2023 when some borrowers start breaching Interest Cover covenants. But the banks won’t put the boot in anything like they did back in the GFC – the Royal Commission made them completely gun-shy. So any pressure on borrowers will be much softer and slower.

Where the activity will be a bit stronger will be with non-bank borrowers at high leverages and less than 1x interest cover. How much of that will happen is a guessing game, as there’s just no data about how much of this lending there is, nor the quality of their books. So I guess we’ll just have to wait and see…

What to do next?

Existing loans – almost everyone we talk to (seriously!), is paying more than they need to. If your interest rates haven’t been reviewed in the last year or two,?you should flick your latest loan statements to us?– we’ll let you know if you’re in the money or not. If you are, sweet! If you’re not, we might be able to save you a bucket load of wasted lazy tax!!

Thinking about buying – whether now or sometime next year? Better to talk to us sooner rather than later – be prepared – so you can jump in knowing what you can and can’t do.