Login
If inflation can't be contained, rates may go up – and create a disastrous ripple effect
Opinion: With the announcement of the recent inflation figures not heading in a healthy direction, many are saying interest rates will be on hold for now. Although this is not ideal, my belief is this may represent a far bigger problem – specifically for the Victorian market but also nationally, writes Adam Flynn, chief executive officer of Flynn Estate Agents.
During COVID-19, many people left Victoria, and the property market certainly hasn’t bounced back like other states around Australia. At this time, regional and coastal markets experienced a significant growth in house prices.
Now, in this ‘post-COVID-19’ society, many of those buyers are looking to relocate back to metropolitan markets.
However, the demand for those markets is not anywhere near where it was during that window of time. Simply, if consumers purchased during the COVID-19 window, they paid a premium.
Many purchased on the proviso, based on Reserve Bank of Australia's (RBA's) advice, that interest rates weren’t going to go up – money was cheap, buyers paid a premium under competition and then saw 13 consecutive rate rises.
Many have been hanging on by a thread, struggling to manage mortgage repayments as it is, with the hope that interest rates would begin to ease, along with the mortgage stress.
Although many have hope for reduced rates, with the recent inflation figures, preliminary indications are that we may now not see a rate cut in 2026.
I strongly believe there is a far bigger issue at foot.
Historically, inflation governs interest rates.
In my experience, the only strategy that I have seen when inflation is rising is for the RBA to increase rates in an attempt to stop spending.
Inflation happens when the cost of commodities increases (oil, wheat, livestock, for example). The cost of living then increases, and the strategy behind increasing rates is to reduce spending, and as a byproduct, reduce the cost of commodities.
With this in mind, I think people are not looking at the bigger issue. That is, if inflation cannot be contained, the biggest concern is not whether rates will come down or stay the same, but that they have the undeniable potential to increase.
If this were to happen (and I will speak for Victoria, but feel that this with be consistent nationwide), many of those buyers who paid a premium during COVID-19 and the ‘pre-rate-rise market’ will be forced to sell due to serviceability.
Most will not be able to sell for the figure they purchased for which means they won’t be able to clear the debt.
Now, if a flood of properties needs to come to the market based on this scenario, the only way for one property to compete with another will be to further reduce prices (supply and demand).
In closing, if inflation cannot be contained, interest rates may very well increase, and the ripple effect could represent a disaster for house prices.
Adam Flynn is the chief executive officer and founder of Flynn Estate Agents.