Weekly Insights Update -
February 1st 2023

Well, the summer holidays are over, and the property markets are up and running again.

Australia’s massive pool of savings will emerge as the economy’s weapon in defeating any recessionary risk this year, as consumers lean on their cash buffers to meet rising mortgage costs and defy the higher cost of living. The Reserve Bank’s policy pause may be in sight, but its monetary tightening cycle is not finished yet.

Queensland Investment Corp’s chief economist, Matthew Peter, expects two further interest rate increases in February and March, implying some moderate pain ahead for borrowers. “Households will still be able to draw on that savings buffer to support consumer spending so that we don’t go into a consumer recession in the first half of the year,” says Peter. “That will be enough to support the economy.”

Rental houses in Sydney’s affluent eastern suburbs delivered landlords nearly $20,000 in extra income over the past 12 months, powered by strong demand and scarce supply, data from CoreLogic shows. • Clovelly was the biggest earner, notching a $381 rise in weekly rent to $1828, handing landlords an extra $19,812 over the year. High demand and low rental stock also lifted Rose Bay house rents by $352 a week to $2242, an additional $18,304 in the landlords’ pockets. “It looks like this will be a landlords’ market for some time yet, especially when we consider the influx of overseas migration which is set to flow directly and immediately into rental demand,” said Tim Lawless, CoreLogic research director.

Sydney’s median house price has dropped 11.3 per cent from its market peak. The pace of declines has slowed, but experts say further price falls are to come. Sutherland recorded the largest price falls in the December quarter. Sydney’s median house price fell more than $170,000 to $1,413,658 last year, the latest Domain House Price Report, released on Wednesday, shows. However, the pace of declines slowed in the December quarter when the median fell 2.1 per cent - three times slower than the previous three months. House prices are now 11.3 per below their early 2022 peak but are still 24.2 per cent higher than they were when the market troughed in mid-2020. Domain’s chief of research and economics Dr Nicola Powell said the housing market posted its steepest annual decline on Domain records, which date back to 1993. ANZ senior economist Felicity Emmett expected the shift to higher rates for many homeowners would lead to a sharp pullback in consumer spending, rather than a lift in distressed listings, as the high employment rate should limit forced sales. She has forecast Sydney prices to keep falling and decline 18 per cent from peak to trough, based on expectations the cash rate would peak at 3.85 per cent and hold steady until rate cuts start in late 2024.

Inflation remains too high and was accelerating late last year, eliminating the case for a near-term pause in interest rates. The bottom line is that the Reserve Bank of Australia will be concerned that its preferred measure of underlying inflation - which strips out some volatile items - was above its most recent forecast issued in November. Inflation may have peaked, but the RBA will have more interest rate work to do in February and March to take the cash rate to 3.6 per cent, and possibly beyond thereafter, to get inflation back towards its 2 per cent to 3 per cent target. Reflecting that higher interest rates loom, the Australian dollar pushed above US71¢ on Wednesday.

House prices in most parts of regional NSW are higher than a year ago, and experts warn ongoing demand from city buyers has permanently lifted prices. Many regional council areas recorded double-digit growth in the year to December despite Sydney’s sharp property downturn, the latest Domain House Price Report reveals. Far-flung areas led the way as Glen Innes Severn Shire a seven-hour drive from Sydney - jumped 30.8 per cent from a year earlier to a median of $340,000. That was followed by neighbouring Armidale Regional Council, which jumped 29.6 per cent to $520,000 and the Upper Hunter which jumped 22 per cent to $455,000.

Typical borrowers facing this year’s fixed-rate mortgage cliff will have to pay about $2700 more a month if they do nothing and are rolled on to their lender’s standard variable rate, says RateCity which monitors home loans.

But by refinancing to one of the lowest variable rates, they could reduce the increase to just $1600 a month - saving just under 40 per cent. This is based on an owner-occupier repaying a $1 million principal and interest fixed loan. The example assumes the Reserve Bank of Australia will increase the base rate from 3.1 per cent to 3.85 per cent by May in line with Westpac and ANZ forecasts.

Sydney’s median property price will likely fall below $1 million in January as Wednesday’s hotter-than-expected inflation data piles pressure on the Reserve Bank to tighten the screws on home loan borrowers with a return to aggressive rate increases.

Until next time.