Property Market on the Edge: Will Rising Interest Rates Trigger Distressed Sales?

Recent shifts in the Australian property market and interest rates have economists and experts analyzing every move. The Reserve Bank’s decision to hold the cash rate at 4.1% for the second consecutive month has raised questions about the future trajectory of interest rates and its implications for the property market.

Jim Malo reports that the property market might reach a tipping point if the Reserve Bank hikes the cash rate to 4 per cent or above. Such a move could result in high mortgage costs becoming unmanageable for some households, potentially leading to distressed sales. On the other hand, Sarah Dowling suggests that many economists believe the next move on interest rates will be a decline.

Louis Christopher, SQM Research founder, opines that stubborn inflation combined with a cash rate of 4 per cent or higher could significantly disrupt the economy. He believes that the chances of a “hard landing” for the economy and a double dip downturn in the housing market rise considerably if we exceed the 4 per cent threshold1. Christopher’s insights stem from his discussions with various lenders, most of whom are non-bank.

“Obviously, it’s a matter of probability, and we think the probabilities would start rising north of 50 per cent of a hard landing in the economy and a double dip downturn in the housing market,” Christopher said. “If we go over 4 per cent … [they] are very concerned, and they believe many of their borrowers will be forced to sell.”

However, Shane Oliver, AMP Capital’s chief economist, takes a slightly bleaker view. Despite recent stability in property markets, Oliver acknowledges the possibility of distressed sales.

“My inclination would be to think if you get above 4 per cent, that would create distressed selling,” he said. “But it hasn’t happened yet and that has given some confidence to some of us.”

In contrast, with the Reserve Bank maintaining the cash rate at 4.1% since June, many are hopeful that rates have peaked. Westpac’s Bill Evans believes the subsequent challenge will be determining the timing of the first rate cut2. Furthermore, Eleanor Creagh from PropTrack opines that with interest rates potentially having reached their zenith, confidence in the property market is on the rise, which bodes well for the upcoming spring selling season.

Yet, a key factor influencing property prices this year has been the shortage of available properties. As Charlotte Pascoe, chief executive of real estate agency Stockdale & Leggo, notes, there’s a significant lack of rental properties, which might be causing some hesitation among potential sellers.

“That is a really big issue because people are scared, if I sell my home, that’s great, at least then I know what I’ve got to spend, but what if I can’t find a rental property?”

As the property market navigates these uncertain times, one thing remains clear: the interplay between interest rates, housing supply, and economic conditions will continue to shape the real estate landscape in the months and years ahead.

References:

“When the property market could reach a tipping point” by Jim Malo. https://www.smh.com.au/property/news/when-the-property-market-could-reach-a-tipping-point-20230310-p5cr5x.html 

“Interest rates may have peaked: what it means for property” by Sarah Dowling. https://www.realestate.com.au/news/interest-rates-may-have-peaked-what-it-means-for-property/