Changes in interest rates may not currently be having as significant an influence on the residential property market as commonly believed and the market may be bottoming out, according to a boutique property investment firm.
Quay Global Investors principal and portfolio manager Chris Bedingfield said imbalances between housing supply and demand are playing a more significant role in shaping the market than the recent rapid rise in interest rates.
Despite the recent increase in the official interest rate, Sydney’s housing market has reportedly stabilised, with residential property prices recording their first increase in 13 months. Meanwhile, national residential prices remain relatively flat.
“This stall in national price declines has occurred in the face of a continued ramp-up in official interest rates and has sparked yet another national debate on the future direction of the Australian residential market,” Bedingfield said.
Historically, some of the most significant price gains for real estate investors in Australia occurred during the periods of 1986-88 and 1999-2009. However, data obtained by Quay Global Investors suggested rental growth and a supply and demand discrepancy defined real estate prices during these periods, rather than shifting interest rates.
“In the 10 years to 2009, house prices increased 225 per cent without any changes in mortgage rates. However, it did coincide with a rapid increase in national rent, suggesting a stark demand and supply imbalance,” Bedingfield said.
He also suggested fears of a ‘mortgage cliff’ may be overstated and while one-third of housing credit in Australia is currently fixed and around half of this will expire in the next year, the impact of the upcoming mortgage expirations may not be as significant as some are expecting.
“Despite a 3.25 per cent increase in the cash rate since May 2022, there are currently no signs of significant distressed selling; indeed, the number of homes currently on market remain well below pre-COVID levels,” he said.
In order to maximise returns, investors should keep a close eye on the rental market, which provides a more accurate picture of demand and supply imbalances, rather than solely relying on interest rates.
“Recent data may suggest we have found a bottom in the national market, or it could be a false dawn. However, for long-term investors, it is worth remembering near-term movements in the official cash rates can be a distraction, especially in times of clear demand and supply dwelling imbalance,” Bedingfield said.
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