The movement of interest rates would not be seen as nail-biting news in most countries, but here in Australia, it occupies considerable space in the news media and is a regular topic of conversation at barbeques and social events. A newcomer to the country may think we are all economic heavyweights and marvel at our education system and collective intellect. Sadly, neither is responsible. Rather, our economy is so closely tied to the performance of the real estate market that it is in everyone’s interests to have some understanding of how interest rates flow through the economy and affect our daily lives.
While there has been much in the media in the past twelve months about our mining boom and how important this has been to the health of the overall economy, and rightly so, this focus has taken the spotlight off the construction industry and its flow on affect to the property market. The number of new housing starts in all states had plummeted in the wake of the GST, and recovery has been slow and painful.
Spooked investors and new home buyers deserted the market, and people with existing homes to sell experienced significant reductions in prices offered for their properties, with many putting upgrading to a better home on the backburner, and staying put. Thankfully, the latest figures show that finally, there seems to be genuine signs of a housing recovery across the board, but this has not yet manifested into any form of relief from high prices for rental properties.
Renters had hoped that a drop in interest rates would also be followed by a rent reduction, but this is not how the market works. In a free market economy, the overriding factor that drives fluctuations in prices is the law of supply and demand. Extraneous factors can make it far more complicated to explain, but put simply, any commodity that is in high demand, but has a limited supply will attract high prices. If we use gold as an example, this precious metal is in high demand for all kinds of uses, but it is hard to find and difficult to extract. This affects the supply, so it always fetches a high price.
With the construction industry struggling over the past couple of years, and property buyers deserting the market, demand for new housing of all types has been reduced. This has caused a short supply of properties available for rent in Liverpool and other suburbs in Sydney, but the demand for accommodation has continued to grow with the population, with real estate rental agencies struggling to find additional properties for rental clients.
These are generalisations and there will be variations to the economic conditions in certain areas. In the mining communities in Central Queensland, for example, demand for accommodation is so intense that rents have skyrocketed to figures that would seem outrageous in suburbia. However, to keep it simple, as long as there are limited supplies of rental accommodation, and increased demand for somewhere to live, rental prices will remain high.
