What rising interest rates mean for real estate
Australia’s commercial property sectors face the first interest rate increase in more than a decade
Australia’s first interest rate increase in more than a decade comes amid global efforts at central banks to curb rising inflation.
While higher food and resource export demand in Australia should cushion the blow to the country’s economic outlook relative to most advanced economies, the raft of potential near- and long-term impacts are still front-and-centre for real-estate market watchers.
“The Reserve Bank of Australia has a mandate to keep inflation low and stable, so had little choice but to respond by increasing the cash rate to try and contain price growth before a wage price spiral emerges,” says Leigh Warner Senior Director, Research – JLL Australia.
Australia’s official rate rose 25 basis points to 0.35% in May – the first increase since 2010. This follows a higher-than-expected 5.1% annual rise in consumer prices during the first quarter. When announcing the rate increase, the RBA cited a combination of high inflation numbers, low unemployment and indications of wages growth as the reasons behind the decision.
“However, it is important to recognise inflation pressures are global and not local,” Warner says. The Federal Reserve recently raised its key rate half a percentage point.
Australia’s residential and commercial property sectors are well placed to withstand further rate rises in the short-term, but global geopolitical risks still need to be monitored closely, Warner says.
“While Australia’s exports, namely food and energy, remain high in demand, there still remains COVID-19 supply chain disruptions,” Warner says, noting disruption to production and supply chains for a range of products is adding to inflation as well.
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One sector where higher inflation and rising interest rates are likely to be a challenge is retail, which is still recovering from the impacts of pandemic lockdowns and supply chain issues. But for real estate investors, retail asset pricing is now more attractive compared to other sectors after some yield softening over recent years.
“Inflation dampens discretionary spending, but there are some offsetting positives for spending including a high household savings rate after the COVID-19 stimulus, a strong labour market, the opening of borders allowing migrants, tourists and students back into Australia and the relaxation of COVID restrictions,” says Warner.
Warner says the rate rise isn’t likely to soften Australian commercial property market asset pricing.
“Despite medium-term bond yields rising sharply in expectation of interest rate rises, commercial property yields are generally priced off long-term bond rates that haven’t moved as much as shorter-term rates,” Warner says. “Investors also generally see property as an ‘inflation hedge’ because many leases are CPI-linked, so allocations to property may increase and this extra competition for assets should keep pricing competition very strong.”
For residential property, rising interest rates are likely to further dampen an already slowing market. However, Australian interest rates are still historically low, household balance sheets are relatively strong and housing supply levels are falling, which should all minimise the impact, Warner says.
“The reduction in borrowing power will further temper the housing market but, barring a further global economic deterioration, I cannot see the supply/demand balance in Australia creating a painful market downturn,” he says.
“Rising rates could also be a positive for apartment market demand. As borrowing capacity falls, more buyers will be attracted to lower price point apartments. Downsizers remain a significant driver of demand and are not generally as interest rate sensitive, they may be even more motivated to sell their larger family house before interest rates rise further.”
Contact Leigh WarnerSenior Director, Research
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