(Louis Christopher & Tom Panos 5th July)
In this episode, we dissect:
- The RBA's recent decision to pause on interest rate rises
- The role of inflation in this
- How interest rate hikes influence various demographics differently, and more
Louis Christopher I think inflation the recent inflation readings from the ABS may well have driven the decision today. The RBA statement did note that the slowdown in inflation and when you look at the monthly numbers the ABS has got annual lives inflation running now at 5.6% Recall earlier this year and late last year was actually as high as 8%. So it is slowing down. There’s still questions in terms of whether we’ll slow down much further than what we have now, given what we know, what’s going on in the rental market, with wages, with services, inflation. But nevertheless, the RBA has noted the slowdown in the CPI today is one of the key reasons why they did go on pause.
Tom Panos
So, Louis, i haven’t read any other commentary that comes with an announcement, and I don’t know whether there’s any information that you can give. Was there any suggestion that this might be at the end of the rate rises or was the dialogue more or less that there will probably be more, or what was the dialogue.
Louis Christopher:
No, they’ve left the door open to more rate rises, so that they’ve made it clear that getting inflation down is front and centre of their objectives. And look, they want to do it in a way which, hopefully, they can achieve a soft landing in the economy. But they’ve long noted that that would be a very narrow pathway. So inflation is definitely front and centre of their minds and the Governor has stated in the past that, look, if we don’t get on top of inflation now, it could seriously have a resurgence and then interest rates would have to go much, much higher. So their view is let’s get on top of inflation first and foremost, and hopefully by doing that we won’t put the economy into a hard landing. But first and foremost we’ve got to get inflation under control. So to an extent that they’ve made it clear that they’re willing to take a bit of a hit on the economy so long as they can get inflation under control.
I’m glad it’s not the only thing we do here, tom, you know. But look, i do enjoy looking at the markets and looking at the economy And I like to look at our forecasting in terms of various scenarios that could play out. I’m not sure what the RBA will do with interest rates sitting in the future, but I can forecast reasonably well in terms of well, if the interest rates do this and this is what it does mean for the housing market or if inflation does that, this is what it could mean for the housing market. And I’ve got to say this year comes more back into our bread and butter where, look, this year we’re not worried so much about so many X-factors such as a virus breaking out. It’s more in line with what is inflation doing? what are interest rates doing? So back to the normal things that the housing market moves on.
Tom Panos:
Okay so, louis, i was speaking to someone yesterday who showed me a letter and it was a letter from their bank telling them what their new rate is going to be. There have been the cohort of people which apparently there’s 1.3 million households that are coming off fixed loans, going on to variable, and this guy is one of those and his loan repayments are going up from $6,000 a month to $10,000 a month. So that’s an extra $4,000 a month, which is $1,000 a week. That’s a huge jump. He said to me I can’t, he goes, i’m going from 1.9% and I’m going to 6.5%. He says I’ve exhausted all my options, including going to refinance. The bank has basically said well, we gave you a very big amount of money when rates were 2%. You’ve got a high loan to value ratio, sorry, a low loan to value ratio. He actually then went on to say that he was on the maximum period of time, which is, i think, 30 years alone. He couldn’t come up to any solution with the bank. So he then said to me what do I do, tom? I’ve got no choice, but I have to sell. I can’t come up with an extra $4,000 every month to keep my mortgage going. There’s got to be a lot of people living in that category of people And I don’t think that that has actually spilled on into people’s lives yet, because a lot of those people are expiring now And the way it works with banks, it does take time before the rate goes up that you get impacted. I can’t help but think to myself come spring which you know, louis, has a seasonal spike in listings that we might have an oversupply of listings and some distress sellers amongst those listings.
Louis Christopher:
Look we made, tom. I got to say that so far, when it comes to distress selling activity, the numbers overall have remained benign. So we’ve just come out with our numbers earlier today. On the market right now, nationwide there’s about 5,300 properties selling under distress conditions out of some 230,000 listings, so it’s still a relatively low number and it’s actually lower than what we recorded pre-COVID. So, yes, i agree with you that there is this caution in the market and concern surrounding the resets which we’re now about to reach the peak, from going from fixed rates to variable rates. Those who actually bought a property in 2020-21 on a very low fixed rate, other ones which are most exposed, and there will be some damage there by a number of property owners who did not basically take into account such interest rate rises that we’ve had, and so there will be some property owners who will have to sell. But I’ve got to say to Tom that certainly in this country, more so than, say, the United States, the property is the last thing to go. People will cut back on expenditures elsewhere. They’ll cut back on holidays, they’ll cut back on restaurants or cut back on buying a new car. The house is a very last thing that goes, and that is because if you own more than what you own in a property, the bank will still come after you. It’s essentially like it’s a fully recall situation for property owners. And so in this country certainly, there’s also a lot of stigma in terms of having to possibly sell your own home, but in terms of cutting expenditure elsewhere, that’s what creates a slide down in the economy And that’s what also, in turn, creates a rise in unemployment. And I do believe if we were to see the economy going to recession, resulting in a spike in unemployment say unemployment getting over 5%, 6% and staying up there, then at that point you would see a lot more falls sales. So once you don’t have a job, once there’s no income coming in, that’s where, okay, everything’s just got to go, just to survive.
Tom Panos:
I’ve got to say to you, if you’re on here right now and you’re in the category of being a property purchaser, investor or even a real estate agent, i would tell you that is a very useful bit of information to actually have. And, louis, i’m fascinated and I want to get your view on it. I’m going to tell you about two case studies. On Saturday, one property was 1371, hannery Road, punch Bowl, sold a year ago for $2,725. Sold on Saturday I auctioned it for $2,450,000. That’s a drop of around $300,000, thereabouts $300,000, and that doesn’t include the transaction cost stamp duty on that kind of property. So the guy’s taken a serious hit. Then I had another property at mascot. They purchased it a year ago for $2,250,000, and they were selling as well. And, louis, there was no takers. No one wanted it, didn’t have to put in a vendor bid. It appears to me that the vulnerable cohort of people are the ones that are selling, that have bought recently.
Louis Christopher:
Would that be that That would make sense too, and that they would be the ones certainly most vulnerable, particularly if they bought in, say 21 or 22, on a very low fixed rate and had no budget for lending rates at running at, say, 6.5%? Yeah, they are the ones most in trouble because they’re selling essentially into what’s been a downturn. as we know, housing prices fell in Sydney and the greater part of the nation over the course of later 2022. Now there’s been a little bit of a pickup in prices in Sydney for the first half of this year, but it hasn’t really offset yet the falls that were recorded from peak to trough over the course of last year. So, yes, i’m not surprised to hear stories of people selling at a loss compared to what they paid for, say, 12 months ago. That would make sense to me, Tom.
Louis Christopher:
Well, investors are generally less emotionally attached to properties as well, tom, outside their principal place of residence. So when it comes to investment property, yes, i’ve found in the past investors generally a little bit more flippant, more happy to move on market conditions. I’ve always said investors generally are the ones who are first to sell in a downturn and generally will be like the last to buy in an upturn in many respects. So we do often see that. Now you mentioned that look, okay, rents have gone up, but it hasn’t completely offset the interest expense, the mortgage repayments, and you’re right about that, despite the fact that on our numbers in Sydney over the past 12 months, rents have risen now by about 18%. But we also know, tom, there’s been a lot of debate and discussion about capping rents, having rental freezes. that seems to be coming up a lot, especially from the Greens, and I would suggest there’s probably some concern by investors out there too that there’ll be more restrictions placed on their investment property in terms of what they can do, given this political discussion that’s been occurring due to the rental crisis. So I’m not surprised to hear more and more investors potentially are looking to sell. I think, too, that early this year, though, there’s been some investors entering into the market to try and capitalise on those rental increases and price falls that we actually had last year.
Recession is two negative quarters of the GDP. (Louis)
From Gill now
I find it very interesting that Sydney appears to be going backwards again going by the conversations between Tom and Louis. Louis feels we are close to going into a recession if that inflation doesn't get into line, he feels that there will be unemployment etc.
Perth is not feeling that decline as yet, it's not to say we won't be, once those higher end interest rates start to kick in with people it never ceases to amaze me just how our two worlds are seriously so far apart.
Rentals on our end are going particularly well still, maybe not the same amount of people that there coming a few months ago (thank goodness) but sales are still going along very well, so its hard to take on board what Tom and Louis are saying. Except we all know about the interest rates of course and inflation are still contributing factors.
We have to take notice of everything of course but Perth right now is in a different space.
MAKE YOUR OWN DECISIONS & GIVE IT A REAL GO!!
SELLING MOSMAN PARK & THE WESTERN SUBURBS!!
KEEPING IT REAL IS OUR MOTTO!!
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