Yahoo Finance The RBA forecast what’s ahead for property, then changed its mind
The property markets have had a lot to contend with lately.
Decreasing affordability in our two major capitals, a significant rise in fixed mortgage rates, rising variable rates, an upcoming election and talk of a real estate Armageddon have dampened buyer enthusiasm, yet vendors are still hoping to get top dollar.
Read more from Michael Yardney:
This is being reflected in slower house price growth and a downward trend in auction clearance rates.
In fact, the 53 per cent auction clearance rate on Saturday, May 7 was the lowest reported so far this year.
At the same time capital city rental markets continue to tighten, with record low vacancy rates still falling.
And at the same time, the Reserve Bank of Australia (RBA) seems to have flip-flopped its view on what’s ahead for our economy and our property markets.
The RBA has changed its view
Earlier this year the RBA thought it had time on its hands and could be “patient” in lifting interest rates, but its Statement on Monetary Policy last week suggests the strong inflation caught the Reserve Bank by surprise.
Now, the RBA has raised its forecasts for inflation and cut its forecasts for economic growth and unemployment.
The RBA now expects the economy, as measured by GDP, to expand by 3.5 per cent over the year to June 2022 (down from the previous RBA forecast of 5.0 per cent), before picking up to a 4.25 per cent annual growth rate in December 2022.
Meanwhile, underlying or “core” inflation is tipped to exceed the top of the RBA’s preferred 2-3 per cent target band for some time yet, possibly through to December 2023.
And while the RBA sees wages growing, the Wage Price Index (WPI) is expected to grow by only 3.0 per cent by the end of 2022 and wages are only tipped to grow at a 3.75 per cent annual pace by mid-2024.
Rental markets tighten over April with higher rents
While house price growth has been slowing in our major cities, capital city rental markets have continued to tighten over April with record low vacancy rates still falling, placing more upward pressure on rents.
According to Andrew Wilson’s My Housing Market, the national weekly median asking rent for houses has increased 14.8 per cent to $521 over the past 12 months.
At the same time, the vacancy rate for houses has dropped to 1.2 per cent.
Wilson’s data also shows that the national median weekly asking rent for units has also strongly increased over the past 12 months - by 12 per cent to $462.
And the national vacancy rate for units has fallen to just 2.1 per cent.
All capitals have reported increases in unit rents over the year to April, with Darwin leading the pack with the sharpest increase - up17.8 per cent - followed by Sydney with a 15.6 per cent increase.
Demand for rental accommodation will continue to increase over 2022 driven by our strong economy, the easing of Covid restrictions and the return of migration which are set to exacerbate a chronic undersupply of rental accommodation.
So, how will rising interest rates affect our rental markets?
We know that falling interest rates were one of the major factors stimulating the once in a generation housing boom Australia experienced in 2021, but now there is concern that rising interest rates will slow house price growth and possibly even cause a housing slump.
And while that may be true, interest rates don’t really affect property rentals.
Instead the rental market is driven by rental vacancy rates.
In general, once local vacancy rates move above 3 per cent, and remain elevated for some time, asking rents start to fall as tenants opt to move rather than pay a higher rent.
On the other hand, rents tend not to rise until vacancy rates fall below 2 per cent and tenants have to compete for accommodation.
Currently, we are experiencing a rental crisis with historically low vacancy rates, which means that property rental prices will continue to increase for the foreseeable future.
Follow Yahoo Finance on Facebook, LinkedIn, Instagram and Twitter, and subscribe to the free Fully Briefed daily newsletter.
