How interest rate relief will unlock a new market cycle

Although admitting that the health of the market is declining, Mr Paliwal insisted that things are not as dire as they look.

He revealed that seven of the nine weak points all link back to one common denominator: interest rates. As soon as interest rates normalise again, Mr Paliwal predicted there will be a knock-on effect across other market indicators, ultimately transitioning the property market “back into that full swing of confidence”.

The first factor the analyst identified as contributing to the market downturn is, of course, sky-high cash rates. But Mr Paliwal also commented that low GDP growth is directly connected to interest rates, observing that “naturally, weak growth is expected if you keep hammering people with interest rates”.

The third point of concern he spotted is the portion of household income set aside as savings, which he noted is “falling off a cliff”. Usually sitting at 8 per cent, the 2023 average is just 3.7 per cent – unsurprising in a cost-of-living crisis fuelled by towering interest rates.

With almost all home buyers relying on loans to fund purchases, borrowing capacity is the fourth indicator to significantly impact the strength of the property market. Worryingly, 2023 is seeing “borrowing capacity slashed 38 per cent” as a result of heightened interest.

These four factors contribute to shaky housing demand, but supply – both current and incoming – has also been impacted by soaring cash rates.

With rental vacancies at an all-time low, rental affordability is in the mud, and mortgage affordability paints a similarly ugly picture.

Mr Paliwal stressed that even buyer confidence has been affected by the high interest rates, with 32.5 per cent of media outlets expressing negative market sentiments.

The good news is that once interest rates decline, these seven negative indicators have a strong chance of following suit – and Mr Paliwal, at least, does not expect high interest rates to continue.

“Interest rates improve, cash rate obviously goes down, household savings ratio improves, borrowing capacity improves,” the InvestorKit founder elucidated.

He added: “GDP will improve due to people spending more money, then as wage growth is happening, rental vacancies will eventually calm down as well. Mortgage affordability will be positively impacted by the interest rate cycle shifting, and consumer sentiment in the media cycle is already starting to shift.”

He concluded by hypothesising market indicators that “aren’t that strong could easily change very quickly” and ultimately take Australia’s housing market into a robust recovery.

Listen to the full discussion with Mr Paliwal here.