Many speculate on property market “Shifts”. Currently, 6/8 of our major capital cities are at all time highs, and are starting to show signs of a slow down in growth (Expect for Brisbane). Some speculators see a slow down and label it as a “shift” in the trend. This often happens alongside other indicators such as days on market, clearance rates and listing numbers, which, if you actually think about, are trailing indicators. Obviously the rate of growth we have been experiencing isn’t sustainable long term, and yes, markets do go up and down, but again this is just speculation based on the visual representation of trailing data on a graph. Sometimes the best indicators come from those with their boots on the ground or from the big boys playing in the bond market that are much smarter than you and I, so, here’s what we can learn from the bond market indicators: 1. Inflation Inflation has increased nearly 4% peak to trough since 2019. Some speculate that this is temporary additional spending coming out of lockdowns. Others speculate that this may kick off a longer term trend, for example, the price of beef and veal increased 20.1% between October 2020 and October 2021. If this is sustained inflation, bond Investors generally expect the RBA to raise its cash rate in response to higher inflation (and when we have full employment). The big four Banks have also increased their fixed rate loans 2-3 times over the last 2 months. This all leads to potential higher interest rates, and what does that impact? 2. Borrowing Capacities When you go for a loan, the lender assesses your serviceability on a different rate to the actual interest rate you pay. At the moment its +3%, so instead of being assessed at 6% (3% + 3%), if interest rates rise to say 4%, you would now be assessed at 7% (3% + 4%). To “Service” a $800,000 P&I loan on an assessment rate of 6% you would need $4,797 of surplus disposable monthly income. For the same amount on a 7% assessment rate, you could only borrow $721,000. That’s $79,000 less that one could borrow to contribute towards a property purchase. With buyers having less money in their back pocket to spend, it becomes a much less “competitive” market. And could cause investors and home owners alike to reconsider their purchase locations to somewhere or something more affordable. 3. Affordability Contrary to consensus, Housing Affordability is actually at all time lows, even though some property values have grown 20-30% in recent years. The cost to borrow for these properties has dramatically decreased as interest rates plunged to address the pandemic. Its first time buyers struggling to save for a deposit to get their foot in the door that are impacted the most with the higher deposit requirements. If interest rates where to increase again though, those on variable loans (about 80% of all borrowers) would feel the impact. Searching for more surplus cashflow each interest rate increase to contribute towards their monthly interest repayments. Spending would slow down in the economy as home owners brace for more interest rate increases and this may spur on the spiral. Housing would become less and less “Affordable” and may even cause some to have to sell. Home owners forced to sell in a market where buyers have less in their back pocket to spend is not a positive outcome for property prices. In summary, it’s typically either the professionals on the ground that feel a “Shift” in the atmosphere at opens homes or auctions or we can anticipate some bigger movements in the economy and because there are 1000’s of sub markets across Australia, often we can’t rely on only one source.

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