The tough market times won’t last, says expert

Citing prominent headlines that have struck up the “‘R’ talk”, Mr Harris reflected that the predictions range from the best-case scenario (e.g. Australia avoiding recession entirely) to the worst-case ones, which entails the country plunging into an unprecedented downturn. 

With this, he recalled a period in Australia’s history when recession also became the controversial talk of the town. 

“Way back in 1990, treasurer at the time — Paul Keating — infamously described Australian economic conditions as struggling through ‘the recession we had to have’,” Mr Harris said.  

Despite this, Mr Harris acknowledged the progression of the economic and property cycle, which includes a boom and recession phase. He also noted that these phases could sometimes be rockier and longer than average. 

He said that in the latest cycle, Australia had undergone its boom phase in the last two years. “A boom is technically a period of strong economic expansion leading to rapid growth in prices, measured by a rise in inflation. We’ve just seen something like this happen throughout COVID with booming property prices,” he explained. 

Meanwhile, he defined recession as a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in economic activity in two successive quarters.

Then, he pointed out the parallelism between these phases as to what’s happening in the current time. “The recession we experienced in Australia in the early 1990s was driven in part to curb inflation. Sound familiar? 

“Well, that’s why leading economists are becoming nervous about the Reserve Bank of Australia (RBA) plunging Australia into recession if it continues to raise the cash rate to curb inflation,” he said. 

While this is not good news, Mr Harris posited that it’s not really as bad as media commentators say it is. 

First off, he explained how the RBA battles rising costs of living through “inflation targeting”, a method introduced in the country in the early 1990s. 

“It’s one of the RBA’s roles to keep inflation sitting at between 2 and 3 per cent, on average, over time. They do this by increasing the cash rate, which influences the interest rates offered by banks, making it more expensive to borrow money, dampening economic activity and thereby lowering inflation,” the expert expounded. 

Mr Harris then drew comparison to current market trends, highlighting that the inflation targeting is delivering slow but steady results.

“In August 2022, inflation was sitting at an annual rate of 6.8 per cent, down from 7 per cent the month prior in July, so raising the cash rate is having an impact,” he said. 

He then correlated how the rising cash rate cycle — which kicked off in May this year and brought the official cash rate to currently stand at 2.60 per cent — has affected property prices. 

Mr Harris said that the impact feels “worse than it is” thanks to the market not seeing a slowdown of the same degree since 1989 — when the RBA needed to pump up the official cash rate. 

With inflation continuing to be above the central bank’s inflation band target and based on the central bank’s latest hawkish rhetoric, the expert said that investors should not wait with bated breath that the rate hikes, along with price drops, will end anytime soon. 

But the expert assured that the RBA is being strategic with its rate cycle. “While the official line from the RBA is that it’s increasing cash rates to bring inflation down, there is growing consensus that they are using them to build a buffer, so that rates can be reduced again in the future.

“Either way, Australia is well placed to either avoid a recession entirely, or — if we do experience a recession — it’s likely to be short-lived,” he stated. 

At the end of the day, Mr Harris said that one thing was sure: once inflation is under control and interest rates stabilise, confidence will return to the property market.

“You need to ignore the media hype, as it could end up costing you dearly! With the benefit of hindsight, it’s likely that now will turn out to be a great time to buy, because all of the less-educated, motivated or confident investors are choosing to sit on the sidelines, waiting to see what happens,” he advised. 

He added that no matter what phase of the property cycle it is, savvy investors know how to take challenges head-on and even capitalise on windows of opportunity during tough market times. 

“With an increase in stock levels as we head further into spring, and fear of rising interest rates driving market hesitation, now could present a very small window of opportunity for savvy investors. Set in context, interest rates are still sitting at historical lows, so stop panicking, review your plan, and keep your eye on the end game!” he said. 

Finally, Mr Harris advised not to be held back from investing in property due to downturn concerns. “Long-term property investors don’t allow themselves to be held back by short-term recessions. They continue to invest because they’re taking a long-term approach,” he concluded.