Our take on the housing market
Our take on the housing marketProperty prices are supposed to decline when interest rates go up!! It has not happened this time, rates have increased by 4.1% since May 2023 and prices have been resilient, in fact prices have increased by 9.5% over the last 12 months (CoreLogic figure).What is causing this?
The reasons are many, we think it is caused largely by supply factors , housing stock is falling short of demand for housing increased immigration, change in demographics that are influencing housing trends where the demand for more medium density housing is rising as the aspiration for a house and land is becoming unaffordable for many.
Builders especially small builders are struggling to make the change to medium density housing which requires more capital and access to labour and materials and more demanding management skills. Several builders in the house and land sector have gone under and people are reluctant to enter into expensive building contracts. As a consequence the existing supply of established homes are in more demand bidding up prices for this limited supply.
Inflation is a big factor in determine the future of house prices. Inflation has trended down but remains unstable whilst construction and housing costs in the CPI are still rising at 5 to 6% . The expectation for construction costs to get down below 3% is that it will take a while given the amount of infrastructure constructions that is sucking up labour from the housing sector and the restrictions in importing labour from overseas.
The Reserve Bank’s Close Eye on Inflation Rates
The Reserve Bank’s Close Eye on Inflation RatesThe Reserve Bank has indicated it is watching the inflation rate very closely and believes at the moment it is too hard to call and are opting to leave interest rates at present levels. The high interest rates are putting pressure on household budgets and it is feeding into low GDP growth rates. Government paralysis and indecision and incresaing dependance on property taxes does not help the situation.
We are most likely looking at a period of low growth, high interest rates and rising labour costs and low productivity in the housing and construction sector. These conditions if they prolong for longer than expected will impact house values with a best case scenario of stagnant growth for a period of time.
Evaluating Your Investment Property
People approaching retirement should review their investment property holdings and consider whether to hold or sell,. People looking for their first home should reconsider their expectations and settle for medium density housing to get their foot into the property market.
Land and property is an important part of the economy and well located land will always rise in the long term. Beware of holding costs such as debt servicing in the short term to get to the long term.
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