Sydney was the strongest property market at the end of 2019 and since bottoming out in May 2019, prices have recovered most of the losses sustained in previous years and were heading for a new peak in the 2nd quarter of 2020. An then came the GVC ( Great Virus Crisis). All those forecasts of double digit growth for Sydney property have fallen by the wayside. Or have they?
When we look at the cycles, we know that when interest rates are lower, house prices are higher and we’ve recently seen interest rates fall to the lowest levels ever, and stay that way for a record period. With less interest to pay on loans, buyers have been able to pay more for the actual property.
But an unprecedented period of low interest rates has had an interesting effect on the market. One of the negative factors in the marketplace has been the expectation that interest rates will rise again, which can act as a negative for buyer and seller sentiment. The line of thought is that what goes down must come up, which, if it happens, will see buyers paying more interest, and sellers’ properties losing value.
But the reality is far removed from the media and market speculation, and cutting through the noise is an important skill for those who seek to understand the property market, and play it well.
The Reserve Bank has stated that there’s no prospect of an interest rate increase in the foreseeable future and there are now more than a few economists tipping yet another rate cut this year. In fact we’re starting to see banks move back into the marketplace looking for business and cutting interest rates. Even those banks who raised rates out of cycle, even by a little bit, have begun to cut rates again.
Understanding interest rates and their effect on the market is perhaps the most important consideration for any property buyer or seller.
Transaction levels are likely to be significantly impacted over the next few months given the restrictions that are in place but this does not mean prices will plummet. So while property values may fall a little in the next few months, suppressed transaction activity means we can expect to see a build-up of latent demand and the markets will rebound in the second half of the year.
It is understandable that many Australians expect the property markets to behave like they did during previous economic downturns such as the GFC in 2008. However unlike previous downturns that were essentially financially lead, this is a medical problem that morphed into an economic issue because of a short-term shut down of our economy.
Based on the predicted pace of post-recession recovery, we expect the pandemic to have a more limited and shorter-lived impact on house prices than either the early-1990’s recession or the GFC.
On the upside, households and property investors whose incomes remain stable and secure will be able to take full advantage of historically low interest rates which should underpin a return to stronger levels of growth in the medium term.