Property investors will be active in the second half of 2022, as they seek a hedge against higher inflation.
There’s been lots of talk about rising interest rates, but in times of higher inflation investors tend to seek real or tangible assets. Cash is not a happy place to be when it is devaluing so quickly. Gold, precious metals, farmland, residential land and real estate are all assets classes where investors will look to put their capital to work this year.
We have never seen a situation before where households have piled up cash buffers as they have over the past two years, with households sitting on an additional $250 billion of savings through the pandemic and its associated stimulus.
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We previously saw a period of high inflation in the 1970s, with the annual CPI peaking at around 17½ per cent in the middle of that decade. The median price of a house in Sydney increased from $18,700 to $68,850 over the course of the decade, for an increase of well over 250 per cent, while real unit prices in the harbour city boomed, recording a nominal increase of over 300 per cent.
Melbourne’s median house price also increased by well over 200 per cent in the 1970s, underscoring that house prices comfortably outpaced an increase in consumer prices over the decade.
The dynamic is different now, certainly, given that interest rates are so much lower, but we expect to see property investors looking for an effective hedge as the headline rate of inflation potentially pushes towards 5 to 6 per cent – or perhaps even higher – later this year.
Rents to rise
We are seeing rents in some locations rising at a double-digit pace this year, which will encourage more investors into the market, with yields of 4 per cent or higher achievable in many parts of the country.
There has been plenty of excitement about fixed mortgage rates rising from record lows from late last year, but there’s still a good deal of competition in the market between lenders, and variable rates are still on the floor.
In fact, large institutions have been cutting their variable mortgage rates down towards 2 per cent in March to date, while many lenders are still offering variable mortgage rates below 2 per cent for qualifying borrowers.
Buyers still need to factor in potential mortgage rate increases if purchasing property today. The regulator now requires that new loans be assessed with a minimum 300-basis points buffer in any case. But borrowers should still consider whether they can afford repayments down the track if interest rates were to rise significantly. We will see negative real interest rates for the time being, but that dynamic clearly won’t last forever.
Sydney and Melbourne look set to record somewhat softer housing prices in March, but many markets around the country and still very buoyant, notably including Brisbane and Adelaide of the capital cities, as well as many regional markets.
In 2019, buyers were concerned about the impacts of a potential change in government.
But this time around the ALP has indicated that negative gearing benefits will remain in place, while also announcing a First Homebuyer Support Scheme to help 10,000 first homebuyers per annum into the market – potentially saving first homebuyers up to $32,000 in mortgage insurance with a deposit as low as 5 per cent, with the government guaranteeing up to 15 per cent of the purchase price.
Overall, this year’s election pledges appear likely to be far more supportive of the demand side for housing, at a time when there is a chronic shortage of rental properties.
Property investors will naturally seek a hedge against inflation in such an environment.
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