Housing sector

More pain ahead for Australia’s property sector as interest rates rise

The average Australian mortgagee is facing immense pressure as the pandemic-induced economic difficulties show no signs of reversing. Most global economies have emerged from the economic slump experienced during the pandemic. However, bigger issues have emerged in the post-pandemic phase, including large-scale disruption of the global supply chain.

Most nations are struggling to effectively manage the flow of supplies into their economy as the Russian-Ukrainian war lingers in the backdrop. The global economy saw fiscal stimulus being injected and then abruptly withdrawn as inflationary pressures took off. These drastic injections of economic stimulus have left most world economies burdened in a highly inflationary environment.

Experts have quickly slashed their economic growth forecasts for the coming years as most countries struggle to return to pre-pandemic growth rates. While demand has rebounded, the capacity to supply these goods to keep the economy afloat has yet to be built.

Meanwhile, central banks around the world are still raising interest rates to remove the additional stimulus provided during the pandemic. Australia’s economic growth has not been affected as severely as that of many other countries. However, as rapid interest rate hikes become regular, the Australian consumer may be faced with limited choices while managing their budget.

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The real estate boom is finally deflating

Australia’s housing sector has boomed at a rapid pace, emboldened by the surge in housing demand. However, the rapid pace of growth in the sector was accompanied by fears of higher interest rates, which ultimately led to a drop in house prices. But the market is still largely unaffordable, with many first-time buyers being excluded from the market.

Housing markets in the capitals of Sydney and Melbourne had seen falling house prices months before the interest rate decision was taken by the Reserve Bank of Australia (RBA). The RBA raised the key rate to 0.35% at its monetary policy meeting in May. Higher interest rates mean higher cost of borrowing, which has become a huge burden for mortgage holders.

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Previously, low borrowing costs led to a surge in housing demand, which eventually widened the gap between supply and demand in the country. Housing supply in Australia has come under immense pressure as fewer homes are available for sale. This has inadvertently created a housing market that has become increasingly unaffordable for the average Australian. In fact, Australia’s property boom is so pronounced that the country has one of the most expensive property markets in the world.

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Is a real estate crash on the way?

As recession fears build in the United States, many economies are also facing the heat created by global supply-side challenges. Australia’s impeccable resilience to foreign shocks has maintained its dynamic economic trajectory. However, the housing market has been a constant source of vulnerability for most Australians.

Fed expresses urgency to raise interest rates in fight against inflation

The RBA went against the grain and delayed its decision to raise interest rates. However, it also meant that the highly inflationary scenario in the housing market persisted for a long time. The RBA’s delayed interest rate hike fueled further inflation concerns until market pundits began speculating on a rate hike. However, some experts believe that economists rely too much on monetary policy and depend on it to remedy economic adversities.

Experts also fear that the cash rate could rise above pre-pandemic levels if current expectations are maintained. More pronounced increases in interest rates could force mortgage holders to reduce their spending on other items. Consequently, a recession could take over and many Australians could be worse off. Instead, a gradual approach with less aggressive tightening could allow the economy to adjust to the critical circumstances that are building up.

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