The reality of June’s cash rate call — and the silver lining
The latest decision by the Reserve Bank of Australia is a tough one for many to stomach.
What we know is that this year alone, we have $370 billion worth of mortgages coming off fixed rates — which is a momentous amount of money, and we estimate more than 2 million Australians will now be deemed in mortgage stress. The hikes are creating a headache for all of us — owner-occupied mortgage holders as well as investors and renters.
So when it comes to property — be it your owner-occupied property or your investment property — what does this mean? Rate hikes are always going to have an impact on property across the board; essentially, if people have to pay more on repayments, it reduces their serviceability.
The reason the residential market is performing well at the moment is because of the lack of supply. Many mortgage owners are sitting on their hands and doing what they need to survive. But there will come a time when they can no longer hold on, and they’ll need to sell. There are a lot of people who have borrowed a lot of money, and this is going to be really painful for them.
No doubt the hike today, and the ones many are anticipating to come, will add to commercial and residential stress. However, as we have seen in recent months, conditions can change quickly.
The reality is that the effects of the rate hikes often have a lag in terms of impact, especially for the property industry — both commercial and residential. We’ll no doubt see unemployment go up, wage growth decline, banks tighten lending and properties liquidating in due course. With that will then come emergency rate cuts.
Is there a silver lining? For some asset classes, and smart investors, yes. When it comes to commercial investments right now, there are some asset classes that are a more favourable choice in this market. Childcare, for example, is an asset class that currently has 100 per cent occupancy because there is a strong demand for the purpose-built asset.
In this market, industrial spaces will also continue to prosper. Following on from our pandemic habits, Australians are completing most of their shopping online, so warehousing continues to have high demand. In addition, there have been numerous small businesses born out of the pandemic, and those that have succeeded have been the types of businesses that are expanding into industrial spaces.
Blocks of units are also an interesting one right now. The demand for blocks of units is elevated despite interest rate movements, with more experienced investors still actively pursuing this investment. Average rents continue to move upwards, and with continued population growth, demand for rentals is not expected to dissipate for families requiring accommodation.
Peter Vines is the managing director of Ray White Commercial Western Sydney.