Herron Todd White’s latest Month in Review report reveals tight market conditions harbour potential opportunities. Image – Canva.
  • Herron Todd White's March Month in Review report has been published
  • US banking conditions amplify economic uncertainty according to Herron Todd White CEO
  • Investors who can handle higher interest rates could now see better value assets available

Robust national monetary policy and the tumultuous international financial landscape are creating uncertainty in Australia’s property market future but Herron Todd White‘s latest Month in Review report reveals there are also emerging opportunities for investors in the residential market.

Herron Todd White CEO Gary BrinkworthIn says that in the current environment, expert perspectives cannot be ignored.

“The pace of change and levels of uncertainty across the economy has now amplified further due to the recent events within the US banking industry,” said Brinkworth.

Interest rate impact

A tenth consecutive interest rate rise signals pain ahead for mortgage holders, particularly those coming from ultra-low fixed-rate mortgages that were seen during the pandemic.

Herron Todd White National Residential Director, Ben Esau says the last three years of the pandemic and subsequent recovery have been marked by significant use of market tools to manage a rapidly changing economic circumstance.

“With any quickly applied market lever, adverse impacts may not appear straight away,” he says.

“Building grants and cheap money created unprecedented building demand and coupled with supply shortages, meant that fixed price building contracts put extraordinary pressure on builders and contributed to subsequent company failures.

“The significant drop in interest rates fuelled the conditions for unprecedented and almost universal increases in property prices across the country, with subsequent sensitivity to value falls and interest rate increases which we are now facing,” Esau says.

Rental market repercussions

Along with mortgage holders facing rate hikes, renters are facing a tight market with SQM Research recording a vacancy rate of just 1% across the country in February.

National Rental Vacancy

“With many market vacancy rates starting with one per cent and even several below one per cent, it’s unlikely there is short-term relief for tenants in sight.

Esau predicts that the tight vacancy rates mean there is unlikely to be relief in sight for tenants in the short term.

The tight rental market is pushing rental asking prices up with the typical weekly rent now sitting at $566 across the combined unit and houses data from SQM Research. This is up almost 13% from the typical weekly rent of $501 at the same time last year.

“Although the prospect of increasing rental values may seem attractive as an investor, it may not be so straightforward as landlords need to grapple with the process of potentially passing on increasing interest rates to struggling tenants,” Mr Esau says.

Pressure on rents is amplified by investors passing their elevated mortgage rates on to tenants by raising rents.

“Of course, there are also investors who will be significantly impacted by the increasing costs to service an investment property, but where banks are generally well structured to deal with clients in financial distress, individual landlords may not have that capability and may need to navigate chasing increasing returns and the human impact of a fast-paced rental market.”

Is the end in sight for interest rate hikes?

With markets in places such as Sydney and Melbourne showing signs of stabilising, there has been a lot of speculation regarding when current interest rate hikes will ease.

“The answer may be that it’s too soon to call; with inflation staying above the RBA’s desired level, they have shown clear intent to keep lifting interest rates until they have a reason not to.”

Ben Esau, National Director of Residential

“A key question will be what’s their reason not to and will they discover this fast enough to avoid further market disruption.

“With estimates that over a third of mortgages are fixed on lower rates and that a majority of those will roll off this year, it could be that the real market test is to come.

SQM Data reveals that stock on the national levels of stock on the market has been subdued for the start of 2023.

National Stock on Market for Sale 

Esau speculates whether the low levels of stock will continue as sellers wait for better market conditions or whether there will be a boost to stock on the market as homeowners are forced to sell if mortgage rates become unmanageable.

There is also hope on the horizon:

“Whilst the above does paint a gloomy portrait of the property market for 2023, with volatility comes opportunity.”

“For investors who can participate at increasing serviceability levels serviceability tests, with buffer, increasing stock levels and lower buyer demand may create opportunities to pick up better value assets than what has been on offer since the start of the pandemic,” Esau explains.

He highlights the sustained low rental availability indicates that rental values are likely to continue to grow, improving investor returns.

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