Rate hikes, economic uncertainty, global recession fears … why experts see positives on the horizon
Headlines recently have been dominated by news of red-hot inflation, rapidly rising interest rates, economic uncertainty, and the potential for a global recession, sparking understandable concern.
But economists are starting to see some light at the end of the tunnel, particularly towards the back end of the year, with signs that inflation is beginning to ease in the United States and Europe.
There are now predictions the Reserve Bank of Australia may be nearing the peak of its startling rate rise agenda.
For the property market, that means a continuation of softer home prices in the near term, as well as higher mortgage servicing costs and a reduction in borrowing capacity.
“It takes time for higher interest rates to fully impact prices and we are expecting to see at least one more rate hike from the RBA in the first half of this year,” PropTrack senior economist Eleanor Creagh said.
“So, with interest rates still rising, we are likely to see home prices continuing to fall in the first half of this year.”
Rates and housing markets
A six-month inflation lag between Australia and the rest of the world could see home prices begin to bottom out in the final quarter of 2023 as the pressure on rates eases.
There’s even the potential for modest rate cuts heading into 2024.
“Right now, the property market is still being impacted by the rate hikes that occurred last year, with the possibility of more to come,” AMP Capital chief economist Shane Oliver said.
“So, there’s still more downside for property to come in the next few months, but the news flow so far this year has been a little bit more positive globally for several reasons.”
The international outlook
There has been much talk about the economic situation in the United States, Europe and China, and how that impacts Australia.
“US inflation numbers have continued to fall and there are signs that inflation in Europe might be rolling over as well,” Dr Oliver said.
“There are still worries about a recession in the US, but Europe has so far been a lot more resilient than feared, helped by the collapse in the gas price over the last few months.
“And although there are still worries about China, its reopening is expected to lead to a large boost in Chinese economic growth, so some of the fears about global recession have receded a little bit.”
Dr Oliver said he expected to see some central banks start to cut rates by the end of 2023 or early 2024.
Good fundamentals at home
Meanwhile, Dr Oliver said firsthome buyer schemes on offer across the country and the return of healthy immigration numbers may help to keep a floor on Aussie property prices.
“There’s a bit of light at the end of the tunnel,” he said.
“Property prices could begin to bottom out later this year, I think probably around September, and then we may see some modest rises from then on as we get through 2024, particularly if the RBA starts to cut interest rates.”
“Obviously there’s still a way to go and in the near term it’s going to be a bumpy ride.”
The ride may be a bumpy one for buyers who took advantage of record low rates at the top of the Covid price boom and now face the so-called fixed rate mortgage cliff.
Still some rates pain to come
Federal Finance Minister Katy Gallagher has estimated that 20% of mortgage holders may be impacted by the rollover from fixed to variable rates this year.
As fixed rate repayments set at
around 2% jump significantly to as much as 6% when they expire, many of those homeowners could face financial hardship.
“We will see some households forced to make budget readjustments rolling onto an interest rate that is much higher than they have been paying, but it will be offset by a couple of factors,” Ms Creagh said.
“Number one, it has been very well telegraphed.
“Number two, they will have made large savings throughout the period of their fixed term.
“And number three, competition among lenders means many won’t necessarily pay the rates advertised,” he said.
“There are often more competitive offers or deals to be made.
“As for those who simply won’t be able to afford to make their repayments when they shift onto a higher rate, you’d have to say it would be a very small margin of borrowers.”
But Mr Oliver said some borrowers facing the mortgage cliff may have a problem refinancing their loans if their homes have fallen significantly in value in the time since they were purchased.
“When rates go up, people are more motivated to search around for lower costs providers.
“But you may not be able to borrow the same amount as you borrowed at first because the value of your property would have gone down,” he said.
“In Sydney, property prices are down, so a bank which may be offering a more attractive rate than the current provider might not lend the same amount,” Mr Oliver said. “So you end up locked into the mortgage.