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How are interest rate rises impacting apartments?

Interest rates rise on apartments – What is the impact?

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We all know interest rate rises impact the apartment market but what else is at play?

When economists refer to the Reserve Bank (RBA) slowing the economy, you will hear them say, “They only have one lever to pull”. This refers to the RBA’s influence on economic policy being limited to setting the interest rate (or cash rate).

This means the only way the RBA can attempt to slow inflation is by increasing interest rates. Well, that is mostly true. But the RBA actually have two tools to slow the economy.

1. Increase interest rates,
2. Talking about increasing interest rates further.

The very prospect of future interest rate rises, slows peoples spending in anticipation of what is ahead. This is a better outcome obviously. If people slow their spending sufficiently, the RBA will not have to increase them as much. Interest rate rises place an inequitable burden on borrowers, so a broader slow down in spending is a much better outcome.

It can take 12 months for interest rate hikes to impact economic activity. After 10consecutive interest rate rises taking the cash rate to 3.60% you can feel the belts starting to tighten. Consumer sentiment surveys are corroborating this. ANZ consumer confidence survey dropped 5.5 points last week to its lowest point since April 2020. You might remember April 2020. It was when we all thought the sky was about to fall in due to Covid.

Conversely, business confidence jumped up in Jan 23 to its highest point since April 2022. A Roy Morgan business confidence survey showed a 10.4 point rise in January 23 which is the largest January increase since the index began 12 years ago. Maybe it is relative to how businesses have been feeling over the last 3 years.

I will let smarter minds than mine figure out why consumer confidence is going down and business confidence is going up. More broadly business confidence is still 6.3 points below the long term average of 112.7. No doubt this point will be raised in Philip Lowe’s meeting with the Senate estimates.

So, what does all this mean for apartment values?

  1. Rising interest rates sets of alarms in peoples head. We fear trouble ahead so pull back. For buyers, it says “my mortgage will cost me more tomorrow so I will not risk it”.
  2. Once interest rates stop going up (and the RBA stops talking about interest rates going up) buyers will feel more confident and re-engage in the market.
  3. The higher interest rate means buyers need to lower their buying budget and the apartment market often benefits from this as they are more affordable.
  4. Rising rental values make apartment returns better for investors who are starting to run the ruler over apartments.
  5. There is likely to be an undersupply of apartments (and housing generally) for many years which will keep an upward pressure on values.
  6. Business is improving so employees (apartment buyers) will be more confident of their future income and more comfortable to buy.

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