Rate rises change property market landscape

Rental yields up, house prices down, and holiday homes on the chopping block; that’s the future for the property market according to some analysts.

Rapidly rising interest rates are affecting the property market from several different directions, but one result that appears almost certain is an increase in rents.

According to BIS Shrapnel data reported by The Australian Financial Review, annual compound growth in rents is likely to reach between 6% and 11% for all capital cities over the next three years, driving yields beyond the current 2.3% to 4.8% average range.

This shift is likely to result from continuing increased demand for rental accommodation because of housing unaffordability and a shortage of supply as rates rise.

At the same time there is now debate among property analysts about whether the property market has started to go into reverse. One firm of analysts, Residex, has reportedly found that average house prices dropped in February in all capital city markets except Adelaide and Canberra, with Sydney prices falling fastest with a 1.5% drop.

While there is some dispute about these figures (and of course there is a huge amount of variation between different areas within each capital city), most analysts agree that prices are likely to continue to soften in the short to medium term.

And the holiday house market – arguably the equivalent of discretionary purchasing in the retail property sector – is likely to be hardest hit by the new tighter market for property.

More bearish market watchers are predicting that holiday house prices are likely to fall by as much as 50%, with those areas where prices have previously risen the fastest to see the biggest drop.

Days to sale are already blowing out in some popular holiday home areas such as Port Douglas in Queensland or Merimbula in NSW, but the phenomenon is far from uniform – some prestige areas, such as Victoria’s Sorrento, have seen a rapid drop in days to sale over the past six months.