Interest rates are on hold for the third time, remaining at 4.1% as per yesterday’s Reserve Bank of Australia (RBA) announcement. And despite the upheaval caused by 12 interest rate rises since May 2022 – the cash rate now at its highest rate since 2012 - the decision to maintain the status quo was in line with investor expectations and opens doors for those looking in the right places says Ray White Commercial Western Sydney managing director Peter Vines.
“Amongst the turmoil of rate hikes and economic conditions we’re noticing a shift to a buyers’ market,” Mr Vines said. “This is giving savvy investors the opportunity to get their hands on better investment opportunities with limited competition and long-term ROI.”
Economic headwinds
There are no guarantees of rates remaining steady come next month of course. RBA governor Dr Phil Lowe said during yesterday’s announcement the bank would be closely monitoring global economic developments, household spending, retail figures, inflationary pressures, and employment data ahead of the September board meeting. Yet with most economists and property observers including Mr Vines forecasting one or two rate rises before year’s end, there is a feeling that a reprieve is near.
“Each time rates are put on hold I believe people feel closer to reaching the point where they will stabilise,” Mr Vines said. “From an investment perspective I think it’s the right time to buy because at some point soon rates will start coming back down. So if you have the ability to buy at the moment, the returns will be that much higher when the cash rate begins to fall.”
Positive markers
While the conversation around interest rate rises largely focuses on the residential sector, the commercial property industry has also felt the pain. Investment volumes are down 58% year on year according to the Real Estate Institute of Australia’s latest Commercial Agency Engagement program report, a drop triggered by the impact of high inflation and rates. The report correctly predicted that rates would remain at current levels this month, as it would allow the RBA to “keep a lid on unemployment and manage inflation”.
The outlook was not all doom and gloom however, REIA President Hayden Groves said. “Unemployment remains near record lows and while business confidence is flat, it is nowhere near the recessionary levels of consumer confidence.”
One of the most positive markers for the commercial sector were the record high levels of immigration forecast over the next few years, Mr Groves said. “Overseas migration is a key driver of demand for commercial real estate,” he said. Both the March and September 2022 quarters were record years for net overseas migration which is extraordinary given how strong migration intake was prior to the pandemic.
“Small-scale commercial assets are often a target for new arrivals keen to start a business and with reasonable supply, high-street stock is finding new occupants.”
‘Just about done’
Ray White Group chief economist Nerida Conisbee agreed there was a light at the end of the tunnel. “It has been a hard slog to get inflation down,” Ms Conisbee said. “But it looks like we are getting very close. It’s hard to believe that it was only two years ago that it was widely expected that after a brief inflation blip upwards, rates would remain on hold until 2024. Now 12 rate rises later, inflation is still above the two to three per cent band. It is coming down but may not be fast enough for one or two more increases.”
Promising signs were all around Ms Conisbee said. “Domestic travel, electricity and fuel costs fell over the June quarter,” Ms Conisbee pointed out. “The rapid increases in construction costs are nearing an end as demand softens and the cost of materials falls. International travel increases were high but are expected to come back as it was primarily driven by Australians heading to a European summer. Even potato price rises are expected to start to moderate as weather conditions for this crop improve. In the June quarter, inflation rose by 0.8 per cent, the lowest level in almost two years.”
There were also promising signals from international markets, starting with the US where last month inflation came in at 3% - well within the 2% target range set by the country’s central bank. And like Australia, rates are forecast to ease by the start of next year at least.
“Even in countries that have been very aggressive with rate rises, increases seem to be coming to an end,” Ms Conisbee said. “New Zealand’s rates have risen far more quickly than Australia, even forcing that country into recession, but the RBNZ has now flagged that they are just about done.”