Is this why house prices may have turned?How could house prices possibly turn for the better if interest rates are rising? A new report suggests the market is over-estimating the power of interest rates and paying insufficient attention to a spike in rent prices.
Rents are rising at a dramatic pace across the national capitals as vacant rates sit at around 1 per cent in the major cities. Asking rentals have lifted by as much as 30 per cent in metropolitan postcodes.
The report from Quay Global Investors points out that Australian property prices can bounce higher when rapidly rising rents signal demand in the wider market is outpacing supply.
Moreover, as the local market looks at what may be the end of a long period of rate rises, the research shows conditions similar to today have been behind some of the strongest spells of price growth in domestic real estate.
According to the report: “The quickest 50 per cent gains have occurred when rates barely moved at all in the period June 1986 to December 1988, and September 99 to December 2002.”
Assessing the latest figures which show unexpected monthly price rises in the bigger cities during March, the report suggests the uptick “should come as no surprise to seasoned real estate investors – there have been plenty of occasions where property prices moved out of sync with interest rates in Australia”.
Along with the highest clearance rates for nearly a year, the month of March saw no price declines recorded in any mainland capital. The combined capitals rose 0.5 per cent and Sydney rose 1 per cent.
Chris Bedingfield of Quay says: “If you look back, we have had these periods where the imbalance between supply and demand – as evidenced by the rental market – clearly helped underpin the rise in house prices without any assistance from interest rises.
“The market is much more complex; it is not all about rates.”
If Bedingfield has it right then the stalling of price falls in the past month could lead to a full turnaround in house prices a lot earlier than many expect. Nationwide, house prices are down around 9 per cent since the peak and many economists still expect the total peak to trough decline to run between 15 and 20 per cent.
Bedingfield does, of course, cover his bets by saying “the data may suggest we have found a bottom in the national market or it could be false dawn”.
Market analysts have been puzzled by the reticence among property investors who have been watching rents and yields rising for months.
Eliza Owen of CoreLogic has issued a new report this week and finds there has been a dramatic 47 per cent drop in the number of monthly investment loans since the recent peak; the total volume declined from 21,660 to 11,485.
Owen points to the fact that mortgage payments for new investment mortgages have, on average, been increasing even faster than rents. She also explains that “having a high rent that exceeds rentals costs is not the only reason investors take interest in property, since more than half of all rental properties are run at a loss”.
Referring to a range of obstacles, including the high premium of mortgage rates relative to owner occupiers and the growing protection and rights for renters through updated tenancy law, she argues “it is worth noting, however, that these long-term changes to investment ownership did not dissuade an investment boom while interest rates were low”.
“The reduction in new investment purchases exacerbates the issue of low rental supply and rising rents … Australians need a new source of investment in rental accommodation.”
Owen raises the prospect that even if the worst of the property falls are over, prospective property buyers are holding back for the key reason that “capital growth in Australia’s home values over the next decade may not replicate the 57 per cent gains seen in the last 10 years”.
