Property takes rates hit

RISING interest rates are dramatically shifting the landscape for residential and commercial property, with higher debt costs slamming into both sectors.

The most vulnerable groups are highly leveraged developers exposed to the massive disruptions in building supply chains and residential property buyers who have loaded up with debt to buy just as the property cycle peaked.

PropTrack senior economist Eleanor Creagh said the lift in the cash rate was widely expected given the Reserve Bank has signalled a desire to “get ahead of the curve” and the bank board was committed to “doing what is necessary” to overcome the challenge of high inflation.

“To ensure inflation expectations remain anchored around their 2-3 per cent target, the board is expected to continue to frontload their hiking cycle,” Ms Creagh said.

The PropTrack economist said how household spending held up against a backdrop of higher inflation and falling house prices versus savings and wealth buffers, and hopefully stronger wages growth, would be crucial in determining the cash rate, and how far house prices fell.

“As interest rates have risen, housing market conditions have moderated, and this is likely to continue as interest rates continue to rise,” she said.

“Market conditions have cooled as buyer confidence has waned, and auction volumes and clearance rates have fallen, sales volumes have slipped and home prices are falling.”

The PropTrack Home Price Index showed a national decline of 1.66 per cent in prices since March and, as repayments became more expensive with rising interest rates, housing affordability would decline, pushing prices further down.

AMP Capital head of investment strategy and chief economist Shane Oliver warned that many households would see significant mortgage stress with a 3 per cent or more rise in interest rates. An estimated 1.3 million households would be affected.

Combined with falling real wages, this could have a “huge impact on spending in the economy and risk a significant rise in forced property sales”.

“Coming at a time when home prices are already falling rapidly due to the impact of rising rates on homebuyer demand, it will only add to home price falls, which will weigh further on consumer spending,” Dr Oliver said.

Resolution Capital said in an update to investors that Australian real estate investment trusts (A-REITs) were exposed due to poor capital management because of their debt structure and the RBA’s “woeful misreading of the economic picture”.

Resolution said Australia lacked a deep corporate debt market that would enable AREITs to “borrow long”. Larger A-REITs could access the US private placement market, but it said they had instead favoured lower-cost short-term local debt, partly influenced by the RBA’s guidance that it did not expect interest rates to increase until at least 2024.

“We expect A-REIT earnings growth will be significantly eroded in the next 12 to 36 months,” Resolution said.