A quick economics lesson for those who aren't financially-inclined.

It’s easy to glaze over at the sight of numbers or tune out of fiscal talk when nothing feels black and white or even relevant to you, we get it.

By now, you’ve seen the social media posts, the news headlines, and your parents talking about the interest rate hikes, as well as the many memes of people opting to walking everywhere to avoid paying for petrol… Some of you may already be concerned, and some may just be laughing at the moment. Either way, interest rate hikes affect everyone - here’s what they mean for you from a financial perspective.

First, scarcity of resources plays a huge role in the reason behind the hikes and is actually at the core of how our economy and general pricing work. Let’s look at some definitions.

  

The same concept applies to LENDING.

Currently, the economy is doing pretty well on the surface, dictated by inflation. Inflation is presently sitting at 5.1% while in comparison, wage growth sits between 2% and 3%, in line with our predicted average inflation growth. 

Recently our property market has been a bit crazy, particularly in Queensland. There are a couple of reasons why this has happened, including (but definitely not limited to):

1. Money was cheap (it has been for a while, though, more on that in a second).
2. The government flooded First Home Buyers with decent grants/concessions to enable housing affordability. 
3. Due to COVID, people were forced to sell interstate and downsize, while others decided they wanted a sea change. Queensland house prices spiked, increasing by 32.1% as a result.
4. Supply and resource shortages - local and international supply chain issues affecting building materials.

Let’s break it down.

1. Money was cheap

Interest rates have been at an all-time low since 2010 when we saw the Reserve Bank of Australia (RBA) drop the cash rate to 0.1%, which meant banks had to follow suit and lower interest rates (they were as low as 1-2% for most prominent financial institutions during this time).

Because our interest rates were incredibly low, money was relatively ‘cheap’ and people could borrow more as their loan repayments were reduced and consequently more affordable for the average Aussie.

The subsequent interest rate hike is due to the RBA increasing that cash rate to 0.35%, which is predicted to fall to 2.5% in the next 12 months.

The RBA sets this cost of credit based on how well our economy is doing. The health of the economy is based on the inflation rate, which is currently at an all-time high of 5.1%. This figure is dictated by the cost of products/goods/services/market resources, as well as how much revenue our country brings in on a larger scale. As we can supply huge amounts of resources in exports, our economy is looking fairly good.

To stabilise the economy and balance inflation with other financial considerations, we have to increase our interest costs to ensure our lending doesn’t get out of hand. An unchecked economy can cause property prices and other goods to inflate beyond their value and render lending futile.

 

2. Government flooded First Home Buyers with decent grants/concessions to enable housing affordability

1. First Home Owners Grant
2. Superannuation Withdrawals 
3. Job Seeker
4. Job Keeper Payments
5. Cash Flow Boosts
6. QRIDA Government Loans 

With all of the government's money circulating in the economy, people who perhaps otherwise couldn’t afford to buy were now looking to buy property for the first time.

Part of the reason the government injected this money was to prop up our construction industry and provide work to a huge industry which represents 9% of our economy's revenue - thus, saving jobs during the pandemic.

We saw a huge population increase in Queensland, which spiked our housing market by 32%, compared to 1-9% in other states. Other major cities had been outperforming Queensland for years previously, however this figure was far higher than anticipated as residents flocked to the state at the fastest rate in years.

For the young first home buyer - they were required to buy off the plan homes, which means developers/builders had to buy up a lot of land quickly, and developers were competing on blocks. Competition is a whole extra financial driver, meaning the closer to a major city these blocks were, the more expensive it was to buy the land due to limited supply and a LOT of demand. The concentration of residents near Brisbane and the coast is a lifestyle issue in Queensland, as most people still work in metro areas rather than regionally. 

This change also allowed first home buyers to buy into the market with 2-5% house deposits instead of 20%, meaning people have less equity in their homes and rely on the market holding steady to ensure affordability. For the older demographic or those that weren’t eligible for various grants, there was additional money in the market and cheaper interest rates to incentivise people to buy up around these areas as well. 

3. Due to COVID, people were forced to sell interstate and downsize, while others decided they wanted a sea change.

Then you had Melbourne and Sydney-goers, who suffered immense mental and financial stresses due to lockdowns. These guys wanted to get away from the restrictions, chasing a more relaxed lifestyle away from metro pressures. Plenty of homeowners realised they could sell their overpriced houses/units/properties and purchase prime real estate in our undervalued property market and still have change left over, offering the ever-enticing idea of financial freedom and a fresh start.

4. Supply and resource shortages - local and international supply chain issues affecting building materials.

The demand for property and immense pressure on the need for building materials on a global scale meant we had (and are continuing to have) massive shipping and transport issues in an attempt to facilitate new builds and renovations. Steel supply costs nearly doubled compared to pre-COVID, which was an increase passed on by builders to the buyers - again, increasing property prices. 

The culmination of these factors has resulted in the most growth Queensland has seen in property demand in over 18 years in housing prices, and 14 years in unit prices. When demand increases so drastically, you see a change in how the real estate market operates. Instead of having standard offers and closed-door bidding, you had an unprecedented amount of auctions happening and houses selling at $200K over reserve. It’s chaotic, but it’s important to understand.

 

So, what does that mean for me as a homeowner and a non-homeowner?

As a homeowner, your current property price will likely hold steady for at least 12 months whilst our economy regulates itself. It’s unlikely to have any more drastic capital growth, and means a couple of other things for you:

1. If you were sensible enough to negotiate some fixed interest rates when they were super competitive, you probably still have some time. 
2. You may not be dramatically impacted if you have also been squirrelling away some extra savings in an offset or putting extra money on the mortgage. 
3. If you have recently purchased a property and have high mortgage repayments that only JUST squeeze into your current budget, you may start to feel the pinch in the coming 12 months.

To start, a 0.25% interest rate increase on a $500K loan will mean you may pay an extra $88/mth on your mortgage. You may think, “Hey, that’s not too bad”...

If you have a $750K mortgage, which many newbies do due to the housing price increase, you may see up to $140/mth in additional repayments.

This is seemingly okay for now; however, there are another two massive issues we need to talk about.

1. If the interest rates increase by another 2%, we can expect the banks to pass this on. This will increase to $704/mth for a $500K loan and consequently $1,120/mth for $750k Loan. That’s where the issues start to come in.
2. Not to mention, the inflation rate of 5.1% means that our cost of living has increased substantially (i.e. fuel prices, groceries, all the things we need in our day-to-day). Usually, this increases at an estimated 2-3% rate, which matches our standard consumer price index (CPI) and wage increases of the same rate. Unfortunately, not all businesses can afford 5.1% pay increases which means there will be a spendings/earnings gap of 2%, unless we can address the inflation issues.

What’s happening is we have a massive increase in interest rates which puts pressure on those that were only just able to afford the home loan in the first place and a potential increase in the cost of living in general without an increase in your pay.

F**k… What can I do?

Help, I bought it in the peak!

1. First thing’s first, check if you do have a fixed interest portion on your home loan; if so, awesome, put a reminder in your phone/calendar on your fridge so that when it’s due, look at shopping around your mortgage and locking in another cheap fixed rate in line with your expectations. Usually, banks offer new customers excellent deals and incentives, so you may have to switch lenders. This will help you decrease that interest scope creeps so you can at least budget for it. Unfortunately, usually, they will only fix a portion of your loan, not the whole amount, but this can still dramatically assist you. Make your decision wisely, and only change lenders if it is truly necessary.
2. Secondly, you need to budget and start putting some extra money towards your offset account to help you weather the storm of and additional financial pressures. 
3. If you can’t afford to save more, you need to look at your earnings capacity. What can you do to make an extra buck, or how can you get that pay rise? Taking a step back and looking at all aspects of your financial situation is important here.
4. If you are partial to a Buy Now Pay Later (BNPL) scheme (think Afterpay, Klarna, Zip Pay, PayPal BNPL or even credit cards), you need to stop and assess. BNPL programs encourage you to spend beyond your means, which can impact your capacity to save and meet your loans.
5. If you REALLY hate numbers, talk to a financial planner or budget planner! (It’s not a service I currently offer for individuals, only businesses, sorry, not a plug).

I’m sweet, surely… my property made a lot during the property boom

1. For you guys, that’s awesome! That’s a great spot to be in but the above still applies; however, you have some equity which means that your financial woes may not be as dramatic as those increases. 
2. If your income/expenses are still pretty hefty, I recommend the above steps as a precautionary measure. 

The property market was ridiculous and I didn’t even get a chance to buy anything… Have I lost my opportunity?

Not all hope is lost. The property market will likely regulate a little bit, depending upon world affairs and the outcome of the federal election. We may have a property price dip, or it will hold steady for some time and bring wages up to the cost of living again. This means you will be able to save and afford a deposit; the government will give more incentives to First Home Buyers still and likely reduce some tax pressures, which will help get you over the line.

However, your cost of finance will likely be more expensive, so the higher deposit you have, the better off you will be. There are other investment options out there to help you invest your money and get a return that will ensure a shorter timeframe to afford that investment. 

Regardless, what’s the rush? Enjoy that avo on toast while you still can. 

 

For the realists/pessimists out there - here's the potential doom and gloom:

If interest rates continue rising, inflation doesn’t drop substantially, and wage increases remain unchanged, there will be a gap and possibly an onslaught of people unable to afford their mortgages. 

The result will be forced sales which has the potential to create an oversupply of properties again, bringing down our property prices.The government will try everything in its power (hopefully) to stop that from happening by continuing to incentivise First Home Buyers. 

This article wasn’t meant to be political. Yet, with an election looming, it has ended up that way. I would highly recommend that everyone researches the various political parties and the policies they’re considering - we know these will seriously impact the next decade of your life and your wallet. I have been guilty of only skimming and knowing what I know because of the impacts of my industry, but being an informed voter is such an important obligation. It allows you to understand what’s essential - what short term promises are you voting for that will potentially have long term consequences? How do social issues interplay with financial concerns? What’s important to your peers and vulnerable communities? 

Now that you have an understanding of how interest rates operate within the broader context, you’re free to spread your financial wings and make the decisions right for you.