- Consumer sentiment fallen to seven-year low
- Reaction to rising cost of living and interest rates
- Property owners well placed to weather changing conditions
There has been change afoot at dinner tables around the nation over the past few weeks.
Over the past two years, conversations were likely dominated by the pandemic as well as the property market.
Last year’s extraordinary property price growth meant that the 70 per cent of Australians who own real estate felt – and literally were – wealthier.
Of course, as is the way of market cycles, such a rapid increase in property prices was never sustainable, with our two most expensive cities being the first to record more normalised market conditions.
Now, that is a very valid point, because we need to be careful that just because markets are not on fire like they were last year, it does not mean that they are not healthy and solid.
Rather, any property investment professional worth their salt would always prefer a more “boring” market than the one that we all experienced last year!
However, times have changed, and the recent inflationary pressures, interest rate increases, as well as the reduction in property price growth is causing consumer sentiment to rapidly shift, with the latest official data proving just that.
The Westpac-Melbourne Institute Index of Consumer Sentiment for Australia fell 5.6 percent month-over-month in May 2022 – the most since June 2015 – and down for the sixth month in a row.
The Index is now at its lowest level since August 2020 when households were unnerved by the “second wave” lockdown in Victoria.
Back then, though, people were rightly concerned about being locked away in their homes for months as another wave, Delta this time, hit our shores.
This time, it appears that the falling consumer sentiment is a reaction to the rising cost of living pressures as well as the fact that interest rates are no longer at the emergency lows that once they were.
Headline inflation is the highest since 2007, plus the Reserve Bank increased the cash rate for the first time since 2010 – both events have clearly unnerved the public, but they really shouldn’t.
According to Westpac, the cash rate will continue rising by marginally increases, until it peaks at about 2.25 per cent in May 2023.
To put this into perspective, because there doesn’t seem to be much of that occurring at present, this was the cash rate at the peak of the Sydney property market boom in the mid-2010s. In fact, when the rising market cycle started in the Harbour City in about 2012, the cash rate was 3.5 per cent.
If the cash rate does increase by two percentage points over the next years, what do repayments look like for investors?
Well, for investors with a $500,000 mortgage, repayments will increase about $190 per week, and for those with a $750,000 mortgage, their repayments will be about $280 per week higher.
There is plenty of scaremongering out there about property owners not being able to afford these sort of increases, when it’s just not the reality for most in my opinion.
Consider that these repayment increases are happening at a time when wages are finally starting to rise as well, because of inflation (inflation generally is not all bad after all and has been stubbornly missing for years).
Plus, and most importantly, investors are receiving higher weekly rents due to the critical undersupply of rental properties, which is a situation not likely to change anytime soon.
According to SQM Research, for example, the weekly asking rent for Sydney has risen 15.2 per cent over the past year, has increased by 13 per cent in Melbourne, and has soared by 16.8 per cent in Brisbane.
Plus, I wouldn’t be surprised if these percentage increases continue to occur for the next year or two at least.
