Chapter 1: What are the implications of the recent RBA rate rise?
it's the real estate podcast across every state city and town of australia and welcome to another episode of the real estate podcast available on iheart radio every morning also on spotify and apple and wherever you get your podcast from it is another thursday and welcome to the fourth day of august for 2022
Coming up, we're going to be talking to Margaret Lomas regarding the rate rise and also the subsequent fallout with the RBA. What is the public feeling and sentiment over where we are at right now?
Chapter 2: How has the public reacted to the RBA's decisions?
We'll try to understand that. And if you're celebrating your birthday for the fourth day of August, have a great Thursday. You share it on the same day as Barack Obama. He is turning 60 today. Meghan Markle is turning 40. And from the history books, tragedy on this day, the Muppets, Miss Piggy and Kermit the Frog, announced the end of their relationship on Twitter.
And that happened on this day in 2015. From first home buyers to property investors and everything in between. Every morning on The Real Estate Podcast.
Chapter 3: What mistakes did the RBA make regarding interest rates?
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Chapter 4: How do rising interest rates affect first-time home buyers?
And in Perth, the showers are back and expecting 17 degrees. It's the Real Estate Podcast across Australia, seven days a week. Well, four rate rises in four months. It hasn't happened since 1990. It's the steepest rise in history. And as a result, people are calling for the Reserve Bank Governor's resignation over saying interest rates would remain low.
and the argument some people are saying is that this leads to the very credibility of the RBA, especially when first-home buyers heard the signalling from the RBA that rates would remain low, and that's when they went ahead with their property purchases, and we all know what happened next. So let's bring in on a Thursday morning Margaret Lomas, a property commentator and host of My Property TV.
Good morning, Margaret. Great to have you on The Breakfast Real Estate podcast.
Thank you for having me.
So it's all a bit of a mess at the moment, isn't it?
It is a little bit of a mess at the moment. First of all, I think the critical error that the Reserve Bank made was to almost issue a promise about 12 months ago that rates were going to remain very low and probably there would be no rate rises until at least 2024. And as a result of that, people rushed in and got their mortgages thinking that they'd remain in the same position as they are.
And of course, that's now not happening. And we're seeing that the Reserve Bank has had to necessarily begin to raise that cash rate. So we have a situation now where we have a significant number of people who, for the first time, they've gotten a mortgage in an interest rate environment that they've known before. No other kind of rate environment like that.
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Chapter 5: What should potential buyers consider before purchasing property?
So there's an expectation that interest rates would remain low. These people have never been in the situation where interest rates have been high. Those people who got their mortgages when the rates were very low, who really only just qualified for that loan, they are now going to be the ones who feel the heat. What's being lost in all of this is although mortgages are going up,
on a landscape where we actually have a lot of other inflationary pressures. So we're seeing power go up. We're seeing petrol go up. As we all know, the legendary lettuce has gone up. So we have all of these other pressures or price pressures around us. And the last thing people needed then was to also have that interest rate rise.
When they were approved for their loan, the bank estimated they could afford that interest rate rise. But the banks weren't fact in general inflation and the fact that the cost of living would go up.
Yeah, so what is your take in terms of coming back to the RBA? And I note that there are a couple of economists that have actually come out and said, well, I think they should resign and perhaps some of the inner circle should step out as well because of that very problem. It has been rumbling over the last three rate hikes.
It seems that the fourth rate hike was the bridge too far where a couple of them have come out and said, I think it's time for them to resign.
In hindsight, I still feel that the only mistake that the Reserve Bank has really made is to almost promise that rates would stay low. So they're being asked to resign on the back of what's probably considered to be a critical mistake by many people. But in reality, whenever we have inflationary pressures, the only way that the Reserve Bank can deal with that is through monetary policy.
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Chapter 6: How are vendors responding to the current property market conditions?
And that policy generally dictates that rates need to rise in order to curb spending. We are anxious and eager to experience the good times and therefore we're spending more. And when we spend more, that's when the inflationary pressures come in.
So what the Reserve Bank is trying to do is they're trying to stop us from spending and curb that discretionary spending on those new TVs and the new things that you get around your house that you don't necessarily need. And the only tool they have to do that is interest rate rises.
It's very difficult for people who are really on that borderline where they just qualified for a loan, housing prices ran away and they're paying so much for a house. But I think we do have to understand as well that there's a flip side to every story. And in this one, it is the danger of runaway inflation, which will be far worse than interest rate rises.
And the cash rate is still below this neutral cash rate that the RBA wants of 2.5%, where the economy is not growing or slowing. If the economy starts to slow from this point, it's probably fair to maybe expect a 25 basis points increase. However, on the other side of the coin, if the economy is still growing, you can bet the house on it that 50 basis points will increase next month.
I think you're right, and it probably will be a 50 basis points increase if the economy hasn't slowed, and it's really not slowing yet.
I don't want to be one of those flippant people who says, oh, but we had much higher rates, and people need to be used to that, and 7% is more normal, because that doesn't help anyone who's currently in a situation where they now have to find extra money to be able to support that mortgage. But I think it could be a good lesson for people,
in understanding that when they do go for a loan, there are two important things that I think people need to know when they are looking to buy a house. The first one is that you shouldn't ever buy in an overheated market. Because when it's an overheated market, you're likely to be buying either on the way up or when the market is just about to turn. Because make no mistakes, markets always turn.
If you buy on the way up or when the market is about to turn, it's very likely that within the next 12 months you will have a property that's worth less than you paid, particularly when you factor in the fact that we have fairly high stamp duties in this country and that adds to your essential buying cost of that property.
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Chapter 7: What future trends can we expect in the real estate market?
So what you pay for that property is probably $30,000 or $40,000 or $50,000 more than the purchase price because of all of those buying costs. Once the market turns, you can quickly lose equity in that property. So that's the first thing. If you're about to buy property, whether you're unsure of rates or not, whether rates are going up or going down, don't buy when the market is heated.
Wait that little bit longer. The second thing to remember is that if you only just qualify for a loan, if you scrape in by the skin of your teeth and you have to use every available income source to prove to the bank that you can afford this loan, if you're using your family payments and your part-time job and your full-time job and every other scrap of income you can save,
scraped together and the bank only just qualifies you for that loan, then it is likely that you can't really afford that loan because there will always be a time when interest rates go up.
Buy a property when you've got a fair amount of margin built in so that these interest rate rise, while they're not nice or welcome, they don't hurt your bottom line as much and you won't feel that stress that you're going to have to have a forced sale.
All right, so we're having a look there at the buyers. Let's turn our attention to the vendors who are sitting on their hands at the moment. And I think next week particularly is going to tell us just how many more are going to fence it as a result of that fourth rate rise.
I want to be able to say that it isn't necessarily the rate rise that is now making vendors wait. We had a very overheated market in Sydney. Coming in behind that, parts of Melbourne certainly heated up and so did Brisbane. The result of that, of course, is property prices flew up and became much higher than they'd been in the previous two to three years.
To me, it's more the fact that in all of those markets, I guess with the exception of Brisbane suburbs, properties then got to the point where the price of them was starting to get out of reach of the average income earner. And suddenly we saw a lot less buyers in the markets.
So where before a vendor could put a property in one of those markets on the market and have interest within three days and probably a sale within a week, we began to see extended times even before rates really started to go up. And that's always a signal that the market is going to cool. So I think the interest rate rises have just pushed that a tiny little bit along.
But we were always going to see around this time vendors deciding that they wouldn't sell now and they will wait for a better time and waiting. And I think if we don't have an interest rate rise next time around, which is highly unlikely, I don't think that situation is going to change a lot.
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