Perhaps the biggest influence on the global housing market thus far has been the hike in interest rates. By mid-June 2022, at least 45 countries had raised interest rates in a desperate bid to contain the most rapid inflation in decades. Some countries like the US, UK and Australia had raised bank rates no less than 7 times by the end of 2022, whilst Singapore had tightened its monetary policy 5 times.
Unlike 2021, which was a year of exceptional house price growth, 2022 was a year of 2 halves with growth marking the first half, and a slowdown blighting the latter half. As the spectre of interest rate hikes looms over 2023, how are housing markets impacted and what are the mistakes that investors should avoid?
Impact of Interest Rates on House Price Growth
Interest rates have had a direct impact on housing values, given how easily they are passed on to the borrower. In Australia, the spike in mortgage rates brought the post-pandemic property boom to a halt in mid-2022 with house prices falling as soon as the rate tightening began: by Dec 2022, growth rate had declined by 5.3% YOY. Similarly, growth rate in the US declined by 11.5% YOY in Nov 2022, whilst in Singapore growth rate slowed to 8.4% (vs 10.6% in 2021).
In the UK, despite a slowdown in annual growth rate, house prices grew by 10.3% in 2022, with the Northwest charting the highest growth of 13.5%. Manchester, Nottingham and Birmingham held firm as the top 3 cities with the strongest house price growth in the UK. Despite the possibility of more rate hikes in the future, many brokers are confident that UK banks have priced interest hikes into their mortgage rates to remain competitive. For example, Skipton International had cut their mortgage rates even before the latest bank rate hike this year.
One must remember that house prices grew exceptionally in the last 3 years because interest/ mortgage rates were at its lowest. Hence, global house prices are expected to correct in 2023, spurring many home buyers worldwide to wait and see how/ if mortgage rates fall back when rates peak. The UK house price growth rate is expected to correct by a modest 5%, however, with more people moving back into the cities, the units/ apartments sector and urban areas are expected to fare better, namely in fast-growing city centres of the UK and Australia. The severity of price correction would not be as acute in cities where there is housing undersupply, high demand and job and population growth.
Rental Growth and Inflation
Unlike house prices, rental growth is not sensitive to interest rate hikes. Instead, it is directly impacted by demand and supply, and inflation.
Rental rates in the UK grew to its highest level since 2016 due to high demand and a chronic housing shortage, compounded by returning immigrants and students, and lower construction activity. London (17%), Manchester (15.6%) and Glasgow (14.1%) recorded the highest rental growth in 2022. For the same reasons in Australia, rental growth was exceptionally strong, especially in the apartment sector in Melbourne (14.2%), Sydney (15.5%) and Brisbane (15%).
With the cost of living already so high in the UK, rental demand is slated to stay strong as interest rates remain high enough to frustrate aspiring local buyers, keeping them renting for longer. A recent study shows that it is becoming cheaper for British locals to rent than buy, thus benefiting landlords.
In the UK, Manchester has once again been ranked as the #1 BTL location in 2023 for long-term property growth, strong tenant demand with a third of residents renting privately. In Australia, high rental demand is likely concentrated in Melbourne and Sydney, which has historically accounted for ⅔ of overseas migrant arrivals.
Housing Demand & Supply: Key Driver for Price & Rental Growth
Housing demand is a key price driver and an integral pillar in our G.O.L.D.M.I.N.E. Strategy © and Proven Property Game Plan. House prices and rents consistently appreciate in areas where there is high demand and lower supply, even in times of crisis, such as the chronically undersupplied markets like the UK.
Research shows that half of the UK’s population increase since 2011 has been from positive net migration. With lockdown restrictions lifted, immigrants and foreign students are coming back to the UK again and flooding the market with fresh demand for housing. Occupancy rates are extremely high above 96% in cities like Manchester, Salford, London and Birmingham, and Melbourne and Sydney, particularly as robust demand for rental housing comes from both locals and immigrants alike. An occupancy of 96% means that there are only 4% of vacant houses available for rent. Typically, a balanced housing market has a vacancy rate of about 5%-7% (ie occupancy of 93%-95%).
In contrast, the pace of house price growth in Malaysia has been at a slow 0.7%, despite a slight rebound in 2022. In fact, house price growth had been slowing down since 2012 due to high oversupply. Penang, Johor and Selangor currently have the highest volume of overhang units, which combined, make up 50% of the overall national overhang. The housing oversupply remains a real problem in Malaysia and will continue to dampen price and rental growth in the short to medium term, at least.
Mistakes That Will Dampen Investment Growth in 2023
2023 is shifting into a buyers market. It is crucial to focus on the fundamentals to avoid making investment mistakes.
Choose to invest where there is an existing undersupply, where there will always be growth in jobs, infrastructure and population, and where there are good transport links.
Understand what are the barriers to entry / investment growth before you invest. Avoid investing in countries where there are active government cooling measures and watch out for the imposition of new taxes that can set you back for years. Financing is important, thus challenges to obtaining loans as well as high interest rates can increase upfront costs and affect positive cash flow, thus lessening your return on investment.
With interest rates rising, it is now more important than ever to focus on the fundamentals and follow a proper game plan to grow your wealth.
Join our upcoming webinar to learn more about global property trends and how to invest in property through both good and challenging times by clicking on the link here: https://bit.ly/3SEliTU
- Cushman & Wakefield Build to Rent Report Q4 2022
- https://napic.jpph.gov.my/portal/key-statistics (Q32022)