- The Reserve Bank has raised the cash rate for four consecutive months
- As the property market cooled in the east, Perth reacted differently
- Property prices in Perth have risen as sharp rises in interest rates occurred during the 2000s
Without a doubt, interest rate hikes have been in the headlines over the past few months.
In May, the Reserve Bank of Australia (RBA) lifted the exchange rate from a record high of0.1% to 0.35%. Since then it has increasedat 1.85%.
The rate hike came despite RBA Governor Philip Lowe’s inflexibility that rates would not rise until 2024, a position he held as recently as last year.
The rise in rates was driven by the sharp rise in inflation, which is at its highest level since the introduction of the GST in 2000; of course, all eyes were on the central bank when inflation came in at 5.1% in April.
The sharp rate hikes were seen by many as extraordinary.
November 2020 was the last time the cash rate changed, and the last time interest rates rose was a decade earlier in November 2010.
Low interest rates are just that: record highs. They are and should not have been expected to remain so. Lender rules have tightened towards ease of service, with APRA advising a stress test of 3% above the lending product rate. Previously, it was 2.5%.
While east coast capitals have felt the pinch, Perth property is unlikely to follow suit.
According to the Real Estate Institute of Australia, many households in Sydney and Melbourne spend around 40% of their disposable income on mortgage payments. Perth households, however, only spend around 26%.
Unlike eastern capitals, Perth only recently matched its previous median price record, set in 2014.
But what does this mean for the Perth property market?
Perth has traditionally been countercyclical to east coast markets, including when interest rates have risen.
Consider two pivotal moments in recent history: the 911 attacks and the Global Financial Crisis (GFC).
Global uncertainty abounded following the September 11 attack on the Twin Towers. In December 2001, the Reserve Bank lowered the cash rate to a then relatively low 4.25%. As Australia’s economy recovered better than expected, the rate began to rise from May 2002, eventually peaking in early 2009, just before the global financial crisis hit.
During these periods of global turmoil, real estate prices have risen dramatically.
The median house price in Perth rose sharply year on year until 2008, according to REIWA.
Until today, the supply continues to tighten. The vacancy rate is currently at 0.5%, a level not seen since 2012. This situation is expected to worsen due to labor shortages and supply chain constraints, making little likely a significant increase in the housing stock anytime soon.
To further compound the problem, WA’s population is expected to reach 3.1 million by the start of 2030.
The housing stock will have to be considerably increased by then to meet demand.
Given all of this, I expect Perth to continue its recovery despite recent rate hikes, and thereafter moderate growth over the next two to three years.