Courting an investment opportunity, but it’s giving you mixed signals?
Don’t worry; it’s not you. It’s the market.
Despite record-breaking streaks, the real estate market is predicted to see falling property prices and rising interest rates over 2023, hitting investment property mortgages the hardest.
Markets are hedged on the cash rate - which has thrown the housing market into a tailspin.
The good news is that investors can break into the market with less capital.
The bad news is that one wrong move may lead to a cash leech or debt cycle.
In this piece, we’re looking to the experts on the current market conditions, what’s causing this flurry of activity and what impact this could have on your current (or future!) property investments.
The Changing Landscape of The Australian Property Market
Investors will face two key challenges in 2023: increasing interest rates and declining property prices.
Consistent market fluctuations throughout 2022 meant investment avenues were repeatedly coming up hot and cold.
Although financial experts agree that the rate of change is gradually slowing down, investors would do well to keep a tab on these two ripple-effect triggers in the future.
Rising Interest Rates
As of February 2023, the Reserve Bank of Australia (RBA) has increased the cash rate to 3.35% - the highest since 2012 and Australia’s 9th consecutive cash rate hike since March 2022.
So why the sudden upsurge in numbers?
What’s Causing Rising Interest Rates?
To break it down simply: inflation.
In 2022, Australia's annual inflation rate hit 7.8%, the highest since 1990. Although this figure exceeded many economists' forecasts of around 7.5%, it was consistent with Treasury predictions that inflation would peak at about 8% in 2022.
In response, the Reserve Bank of Australia raised interest rates to curb rising inflation.
While higher interest rates make it more expensive for businesses and individuals to borrow money, it can slow down spending and help manage inflation.
But how do interest rates affect property values? As interest rates rise, future income becomes less valuable, and borrowing conditions tighten, affecting the current value of residential and commercial properties.
Forbes Advisor reported two main contributing factors for this upsurge in numbers:
- Demand shock
Demand shocks occur when the demand for goods or services changes suddenly and unexpectedly. In the case of Australia's current inflation, the pandemic, lockdowns, and restrictions had people spending more time at home, which led to an increased demand for durable goods and home renovations.
This sudden surge in demand caused a supply shortage, leading to price increases, and contributing to inflation.
Here are a few cases of demand shock we saw over the pandemic:
Home renovations and improvements: The Australian Bureau of Statistics reported a 2.7% increase in construction activity in the September 2021 quarter, with renovations and alterations accounting for much of the growth.
Electronic goods and entertainment equipment: A global shortage of semiconductors has resulted in supply chain disruptions and price increases for electronic goods.
Cars and automotive parts: Pandemic-related supply chain disruptions have resulted in a shortage of new cars in Australia, with many dealerships experiencing increased demand for used cars.
Travel and accommodation: The domestic tourism industry in Australia has seen a strong recovery in the wake of the pandemic, with an 11.5% increase in domestic travel spending over 2021-22.
- Supply shock:
Unexpected disruptions in the supply of goods or services are known as supply shocks. The pandemic played a big role here, with lockdowns resulting in the sudden closure of many factories, causing massive supply shortages.
Several ships were also pulled out of service during the pandemic, causing a 400% rise in shipping rates. In addition, the unforeseen Russian invasion of Ukraine further strained supply chains, bumping up oil, food and gas prices to staggering highs.
Here’s a few cases of supply shock we’ve seen over the last few years:
Building materials: With disruptions to global supply chains and increased demand for home renovations, the price of building materials in Australia increased significantly, with lumber prices surging to record highs.
Semiconductor chips: As we mentioned earlier, the global shortage of semiconductor chips affected the supply of electronic goods, including cars, leading to decreased production and increased prices.
Food and agriculture: Disruptions to global food and agriculture supply chain caused by the pandemic resulted in shortages and price hikes of certain products in Australia. The price of rice increased by up to 30% due to panic buying and hoarding in the early stages, coupled with reduced production in major exporting countries.
Energy: In 2021, Australia experienced a cold snap that led to a surge in demand for natural gas used for heating. Increased demand and supply chain disruptions caused natural gas prices to skyrocket.
The increasing costs of sustaining business have resulted in rising prices for customers. Many Australians have felt the squeeze by having to cut back on essentials and living standards.
Some may be feeling the brunt of the blow even more. With the lockdowns wiping out numerous livelihoods, many were forced to dip into and often use up their life savings.
The wage drop of 2.7% has also contributed to the fiscal tightening. This has resulted in fewer mortgages being taken out all around.
Impacts of Rising Interest on Property Investment
Apart from property management fees and real estate agent charges, a good chunk of your costs will be mortgage payments.
With the cash rate rising from 0.35% in May 2022 to 3.35% in February 2023, mortgage holders now pay double or triple the initially expected rates, particularly if they’re on a principal and interest loan structure.
The good news is that these mortgage interest payments may be tax-deductible as long as investors have purchased the property with the intent to rent it out as a source of income.
Do Investment Properties Have Higher Interest Rates?
In a nutshell, yes. Although the overall purpose of investment properties is to generate income, banks approving their purchase through home loans may remain a little skittish.
This is because of the number of uncontrollable variables involved with renting out an investment property, such as market conditions and rental occupancy.
A bad investment property or period may result in the bank being left high and dry on its repayments, so slightly higher figures are charged as a guarantee.
Here’s a quick comparison of the variable interest rates between owner-occupier home loans and investment home loans worth $400,000 (as of September 2022):
Variable Interest Rate Comparison for $400k Home Loans (Owner-Occupier vs Investor) - Sept 2022
Average Interest Rate
Total Interest Payable
Owner-Occupier (Principal and Interest)
Investor (Principal and Interest)
Owner-Occupier (Interest Only)
Investor (Interest Only)
Falling House Prices
Since 2022’s final quarter, investors have seen a steep decline in Australian property prices.
Latest reports show property values plummeted nationally by around 0.09% in January 2023 and are now 4.51% below their peak.
According to CoreLogic, annual sales also reduced by 13.3%, with approximately 535,000 houses sold nationally.
This came as a complete surprise to investors. Historically, Australian property prices have enjoyed tremendous growth year after year.
The market had experienced one of the most significant price growths in history just a few years back. So what changed?
What’s Causing Housing Prices to Fall?
According to Forbes Advisor, several factors resulted in the price decline of Australian properties:
- Reduced demand:
Higher investment property interest rates translate to higher mortgage loan costs and tighter borrowing conditions.
The added cost and hassle have put buyers off when purchasing properties, and demand for properties across the market has reduced.
This has led to property sellers slashing their prices to record lows.
- Dipping of housing boom:
The housing boom was largely triggered by low, emergency interest rates, a strong economy, low unemployment levels, and large savings during the pandemic.
According to Eliza Owen, Head of Research at CoreLogic, the housing market peaked in April 2022, and Australian property prices grew to around 30%.
After the pandemic, however, things changed. With high inflation and living costs now experienced across the country, this caused a ‘cooling effect’ and saw Australian property prices bounce back to their normal levels.
This has resulted in a seemingly considerable property price drop, even though property values are still 28.5% higher than pre-pandemic.
Low property demand and high living costs have made this a buyer's market. Even in capital cities where market performance has been favourable towards investors, the decline in property values has set up an expectation of reduced rates across the market.
According to CoreLogic data, residential real estate values decreased from $9.6 trillion in December 2021 to $9.4 trillion in November 2022, while annual sales declined by 13.3% with approximately 535,000 homes sold nationwide.
Will Property Prices Continue to Fall in 2023?
Property prices are affected by a number of factors, and these factors are constantly changing, making it difficult to predict property prices accurately.
It's worth noting that property prices in Australia have been increasing steadily over the past few years, with some regions experiencing a slowdown or stabilization.
However, there are also concerns about rising household debt, tighter lending standards, and the potential impact of global economic conditions on the Australian property market.
Here’s a closer look at the numbers (as of 1st February 2023 by CoreLogic):
Sydney Property Prices
Type of Property
Melbourne Property Prices
Type of Property
Canberra Property Prices
Type of Property
Brisbane Property Prices
Type of Property
Adelaide Property Prices
Type of Property
Perth Property Prices
Type of Property
Hobart Property Prices
Type of Property
Darwin Property Prices
Type of Property
Impacts of Falling Prices on Property Investments
- Reduced Purchasing Costs:
Although falling property prices may not be good news for most investors, this is the perfect market for new investors to break into. Experienced investors will find there are golden windows of opportunity to slip through with flexible purchasing conditions to attract deals.
- Steady Rental Yields:
For most Australians, buying a property is no longer an option due to the high borrowing costs involved, and we are seeing a steady trend moving towards rentals.
Rental vacancy rates have dropped to record lows nationwide due to increasing demand. For investors, this is great news - not only does it reduce investment costs, but it also ensures steady cash flow.
With the high number of tourists arriving in Australia every year, landlords and investors can also convert their long-term stay rentals to short-stay rentals.
According to PropTrack, rental rates rose by 7.5% in 2022, while unit rental rates rose by 9.5%. Rental prices hit record quarterly growth in September 2022 and gradually slowed down in December, with rates remaining unchanged.
Rental Price Change For Houses
Rental Price Change For Units
- Longer Times on Market
Investors and property owners may find themselves tackling a longer and more tedious selling process than usual.
According to Realestate.com.au, the number of inquiries per listing had decreased by 34.6% year-on-year in December 2022.
Reports also show that the median time on market for listed properties was 42. This is a 10-day increase from previously recorded lows in December 2021.
- Riskier Investments
Reducing property values can make home loans risky.
In spite of constant property price fluctuations, your bank repayments will remain fixed. A falling market makes it unlikely that you can recoup the entire amount you spent on the property plus the interest rate if you sell it soon after buying it.
However, statistics affirm that you won’t run a risk of turning a loss if you choose to hold the property for at least 8 years.
What does the future look like for investors?
Experts predict that investors may still be swimming in turbulent waters for a few months longer, despite signs of inflation peaking.
According to the Reserve Bank of Australia, interest rates on investment properties are likely to continue to increase until the economy is brought back to normal.
A peak-to-trough market fall doesn’t have to mean that your investment plan is doomed to fail. Played right, investors can maximise returns on their property investments and take some control over a down market.
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