Low interest rates aren't driving the inner Melbourne market
Each week for almost two years we have heard auctioneers proclaim now is a good time to buy as interest rates are low. In the media recently, we now read we are in a housing 'bubble'.
If there is to be any interest rate changes this time around, they may have to be particularly punitive to have an effect on the current Inner Melbourne $1 million plus market.
Why?
Because interest rates are not a direct key driver of the currently strong inner Melbourne $1 million plus market.
In our opinion the current key drivers of this market are
- Population/locals/demand with long-term increased “non debt” wealth.
When you are not using debt to fund your homes, or if you are using say 50% debt, then interest rate movements do not affect you as much as if you were using 90% debt to fund your home. From our experience of buying 100 plus homes every year, we see that very few inner Melbourne $1 million plus homes are bought on 90% debt ratios.
We note that interest rate increases can dampen business demand, which ultimately affects a business-owner home buyer. But that takes some time to have an effect if the business owner is low on debt as many are since the GFC – we are.
The Inner Melbourne $1 million plus market has at its foundations a lot of local professionals who are immune from interest rates effecting their businesses such as doctors.
The Million dollar super fund that buys property is now an active phenomenon that wasn’t here pre GFC. And of course there are other tax advantaged investors who create demand and limit supply. - Chinese nationals
If you are a Chinese national then Australian interest rates only seem to refocus your home buying activities when there are major changes in the Australian dollar such as 10 or 20 cents rather than 1 or 2 cents. This we see when competing against and acting on behalf of Chinese nationals during times when the Australian dollar is fluctuating dramatically.
We think minor interest rate changes have little effect on the above.
Inner Melbourne home buying demand is a bit like inner Melbourne traffic – demand is so deep and supply so restricted that game changers that worked 20 years ago, such as new freeways, may not work today.
Right now interest rate changes may not change the strength in home buying demand – a new tool is needed and we’re not sure fear of higher interest rates is that “new” answer and besides it’s not new anyway.
Fear is a primal behaviour changer. There’s no question the media talk since the winter break has changed and now has a focus on fear such as bubble, unsustainable, record and so on.
But will fear have the desired effect? And who will affected the most?
Is the inner Melbourne $1 million plus home buying market a more sophisticated, seemingly less debt orientated market, more overseas based than it was pre-GFC? We think so.
The inner Melbourne $1 million plus waterhole has limited capacity and holding back the herd through fear can only work for a while – ultimately we all still need to drink. When you are actively increasing the size of the herd, maybe you need to look there; rather than trying to change the behaviour of the herd, if a sustainable future, especially for younger home buyers is a worthwhile goal.
Are stock levels causing this current market to do what it is doing?
With two big auction weekends coming up – any talk of market strength being solely due to low stock levels will be proved or disproved.
We think it will be disproved as we see an underlying strength across the board – except right at the Top. At the top, the market is not quite as consistent as it is at the lower levels.
There have been consistently well above two bidders per auction each week and that says to us the bidder depth should be able to soak up this first wave of spring stock – meaning buyers will have to compete.
But if we’re wrong then you’ll read it here soon.
Mal writes weekly auction reports, advice and in-depth market analysis on James' website.
