Are we about to reach tipping point?
Australian homebuyers and property investors have been very tentative in recent months. While the economics of property markets are extremely complex, there are three key factors holding buyers back:
- The constant threat of interest rate hikes
- Sizeable increases in the cost of living
- Uncertainty about the strength of the economy
But have the tables turned? Are there signs of life that will lead to the market flourishing in the months and years to come?
In most parts of the country we’ve seen stagnant or declining property values for well over a year while buyers have sat back and waited. However, although the abovementioned factors have been telling us all that it’s not the right time, it only takes a few changes for the tide to turn, and perhaps those changes are imminent.
Firstly, the threat of interest rate hikes has been hanging over homeowners’ and homebuyers’ heads throughout 2011. However, we have only seen one rate change in the past 14 months - and with many analysts now predicting we won’t see any increases until next year, this threat seems to have somewhat diminished. Some have even touted the prospect of rate cuts. While Homeloans always insists that homebuyers allow for increases in interest rates, changed expectations are bound to have an impact on market sentiment.
Scott McWilliam, general manager funding and operations at Homeloans says the RBA’s decision to leave the cash rate on hold this month was welcome news to the local economy including the property sector.
“Medium to long term property investors have been waiting patiently for a clearer signal from the RBA that rates will not aggressively increase over the short to medium term – and I believe they got that signal on Tuesday,” McWilliam said.
Increased living expenses have been a major concern for Australian Homebuyers. The latest Homeloans Homebuyer Barometer showed that 37 per cent of us (and growing) rated this as our greatest financial concern. Inflation has been raised by temporary price increases due to extreme weather events, however this is gradually subsiding. The looming carbon tax has impacted on sentiment mainly due to the fear of the unknown, but as the government feeds us more and more detail the unknown will gradually become understood and we will develop more of an insight into the net impact on our hip pockets.
One soaring living expense is that of residential rents, which have increased in the vicinity of 25 to 30 per cent in many parts of the country in 12 months alone. Those caught in the rent trap would undoubtedly be looking at their options to buy. The reality is that rental prices in their own right could contribute to a shift in property market trends.
“This has been a common trend for property price appreciation to follow periods of strong rental growth, but many other factors are also at play including general consumer confidence,” McWilliam said.
The third factor is the economy, and while there is a long term correlation between economic growth and property prices, it is often market sentiment about economic growth that has the greater impact. Despite many recent indicators having suggested the contrary, the Reserve Bank maintains that “over the medium term, overall growth is still likely to be at trend or higher, if the world economy grows as expected”. If they’re right (and assuming the world economy grows as expected), then that’s three out of three of these inhibiting factors for property market growth that have changed.
So the question that abounds is whether these changes, combined with stagnant (and therefore potentially undervalued) property prices, will spark a stampede, or whether buyers will continue to sit back and wait. RP Data recently reported that the rate of decline in property values has slowed so, using a bungy rope analogy, perhaps they’re about to fly back up.
If the tipping point is reached, then it could be on for young and old - but if not, it could be a long wait.