The cash rate is on the move again. After this article went live, the RBA lifted the target cash rate by an unprecedented 50 basis points – it is now 0.85%. As before, major banks and other lenders will lift interest rates to reflect the new rate. The numbers may have changed, but our advice hasn’t – read on to find out what this will mean for real estate.
What RBA rate hikes mean for real estate agents
The Reserve Bank of Australia has just lifted the official cash rate (OCR) for the first time in over a decade. What does that mean for property prices – and real estate agents?
What’s up with the rate rise?
After record lows – around 0.1% for much of the past two years – the OCR is on the rise. Earlier this month, the RBA announced a 25-basis point increase, to 0.35%. In some respects, this is a good sign. It reflects the fact that the pressures of the pandemic are easing, and the economy is bouncing back.
But it’s also a response to inflation going into overdrive – core inflation hit 3.7% in March and is still expected to reach 4.75% by the end of the year. This has been driven not just by a robust economy and low interest rates, but also by global events including the war in Ukraine.
What does it mean for regular Aussies?
The OCR isn’t just an abstract concept. The rise signals an end to the cheap lending that has driven the massive rise in house prices over the last few years. In response to the rise, all mortgage lenders, including ANZ, The Commonwealth Bank and Westpac, have already passed on the entire amount in the form of interest rate hikes for mortgages. Another interest rates rise is expected in the next few months. This will put pressure on Australians who have oversized mortgages and little wiggle room in their budgets.
The other side of the equation is that interest rates for savings accounts and other types of investment are also likely to go up. This could mean a shift away from the property-centric approach that has dominated for so long, with other investment classes coming to the fore.
What will happen to house prices?
Aussie property prices have been steadily increasing for decades. During 2020-21, driven by those super-low interest rates, steady growth turned into a serious surge. In 2021 alone, the median price for residential property rose by a massive 16.4% compared to the previous year. The number of sales also rose by a staggering 42% in the same period, showing strong demand.
The OCR rise – and increasing interest rates – will dampen demand and slow this this trend. We’re not likely to see a huge drop to match last year’s increases, but growth will probably slow, and prices may ease slightly. Already, house prices in Sydney and Melbourne are falling – albeit modestly so far. As interest rates increase even further, prices may continue to decrease – one major bank predicts a drop of 5-10% in 2022.
It makes sense: higher interest rates mean many borrowers won’t be able to service loans at the same level, and banks may be more cautious about handing out high loans to low-deposit borrowers. Buyers will be watching rates closely as well, and the FOMO (fear of missing out) that helped drive prices through the roof might just turn into the less-catchy FOPTM (fear of paying too much).
What does this all mean for real estate?
Real estate is a cyclical industry. In good times, when houses sell in days and prices are off the charts, agents get a steady flow of commissions. In more challenging times, it’s not so easy. The industry in Australia is facing leaner times, not just in terms of prices, but also in the volume of sales. As demand decreases and prices drop off, vendors are likely to hang back – meaning fewer sales opportunities for agents.
A cooler market can also lengthen the sales cycle. Instead of homes that sell quickly and go unconditional straight away, there are more conditional offers and potential sales that eventually fall through.
Keep commissions and cash flowing
For many agents these times can be challenging. Because real estate is a commission-based field, income relies on a steady stream of sales. If the sales cycle stretches, it can be hard to balance spending and ensure sufficient money on hand when you need it. Many agents bridge the finance gaps by taking out personal loans, maxing out credit cards or going into overdraft with their bank. These options may work to a point, but they’re an expensive, stressful and ultimately unsustainable way to manage your finances.
That’s where Butn Now comes in. Our Butn Now service gives you an upfront advance on a commission, even if it’s weeks or months away. Butn then gets paid at settlement. Simple. And, compared to a personal loan or credit card, costs are low. It’s a great way to bridge the gap between commissions and get through a challenging time.
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