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Rise in Interest Rates & Apartment Demand

Interest Rate and Apartment Demand

With global and country-wide economies in turmoil, Melbourne residents, among many other Australians, are on the receiving end of an obvious by-product: rising interest rates and their impact on the property market. With the recent surge in interest rates and mortgages, many mortgage holders, potential first-time homeowners, and investors find it wiser to shift focus to apartments.

Central banks worldwide have pushed borrowing costs upward despite financial hardships, including the Reserve Bank of Australia (RBA). Governor Philip Lowe announced a 75 basis point increase in cash rates going up from 0.10 to 0.85 percentage points. The RBA expects to increase rates to 1.35% by July, marking a rise in interest rates for the first time in 11 years.

When interest rates rise, the price of real estate goes down as demand for housing slows from increased cost of borrowing. This coupled with inflationary pressures has created a new market for apartments for Australians seeking affordable housing.

Attempts at Economic Homeostasis

The economic cycle goes through four stages: expansion, peak, contraction, and a trough, ultimately determined by consumer spending, employment, gross domestic product (GDP), and interest rates.

The current upward change in interest rates after 11 years of decline has been an attempt to bring back rates at pre-pandemic levels. However, many global and domestic factors also come into play in creating economic instability. Globally, the Russia-Ukraine war and the resultant impact on global fuel prices have a strong economic influence, while domestic factors like a comeback in spending after the pandemic is causing supply shortages making it difficult to meet consumer demand and eventually causing higher inflation.

Economists suggest that even though it may be a sign of incoming recession, the world economy is currently undergoing a period of stagflation only with rising prices and slow-down of economic growth. The announcement from the RBA to increase the cash rate can be considered as an attempt to lead the economy into a healthy expansion state.

Impact on Property Market & Homeowners

Mortgage holders in Australia are feeling financially constrained as the interest rate continues to climb. Potential home buyers may want to explore their options to rent or consider purchasing a unit as a safe alternative to buying a house and finding themselves bankrupt.

Fast-rising cost of borrowing makes it harder for new homeowners to find affordable and livable homes. For some homeowners who’ve already taken out a mortgage, their mortgage costs are growing while their home value shrinks. While first-time or potential home buyers are discouraged from spending money for fear of increased loan repayment, which significantly reduces their disposable income.

Even though the reduced demand for housing may reduce property prices, the current interest rate levels are not low enough to make property prices rapidly spiral downward yet.

In the past, low-interest rates encouraged Australians to borrow more, allowing them power to bid over their dream home. Today, the opposite is happening: homeowners are now shifting their spending to what they can afford.

Despite higher borrowing costs leading to plenty of vacant homes in the real estate market, purchasing a free-standing home could become a nightmare and it may be wiser for Australians to instead invest in high-density apartment units at much cheaper rates.

The Upside for the Apartment Sector

As Aussies weigh their options, buying standalone homes sounds more enticing than an apartment unit, but the increasing interest rates may become the ultimate decider for any upcoming real estate investment decisions.

The Disparity Between House and Unit Prices in 2022

In 2022, Aussies have been relocating to high-density living as a post-pandemic move after months of lockdowns and border restrictions. Costs of both housing and units have been growing over the years; however, CoreLogic explains how the disparity between median house prices and median unit prices seems to be widening and is at a record high. Experts predict that affordability constraints will attract Australians to consider purchasing affordable units over detached homes. Take a look at some median price differences in key cities:

  • Melbourne’s median house price is $1,092,144 compared to the median unit price of $578,775
  • Sydney’s median house price is $1,590,932 compared to the median unit price of $796, 524
  • Brisbane’s median house price is $831,346 compared to the median unit price of $437,034
  • Adelaide’s median house price is $750,084 compared to the median unit price of $376,977

And as inflation continues to rise, Hobart, Melbourne, Perth, and Sydney have a median house cost of over $1 million compared to apartment unit costs of under $1 million.

What the Future Holds

In the next couple of years, Australians should expect the RBA to increase interest rates further to align the economy towards long-term stability. With that in mind, the housing market may further plunge downward as less people opt for purchasing expensive detached houses.

However, you can expect potential home buyers and investors to keep their focus on more affordable apartment homes and units especially near busy city centres to prevent the burgeoning debt of mortgage loans, have the advantage of location to maintain their unit’s value, and ride through this wave of economic uncertainty.

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