The release of December quarter CPI numbers this week has once again focussed attention on what is now considered to be the very real potential of official interest rate rises sooner rather than later. That prospect usually sends a shiver of fear down the spine of the residential property market, but I wonder if we really do have reason to worry.
The numbers tell an interesting story. The Consumer Price Index rose 1.3% in the last three months of last year and 3.5% up for the full year. And I think everyone is really feeling it. The rise in prices of everyday items feels more obvious than I can ever remember it being before.
Of course, COVID doesn’t help matters. Supply chain issues haven’t just led to a shortage of goods, but they’ve also led to goods that are available being more expensive. The CPI data showed in particular that fuel increased 6.6% in the December quarter which obviously is a significant daily cost to households as well as a significant input cost to goods and services.
Raising interest rates is traditionally a method to curb inflation. Increasing the cost of accessing money reduces the demand for money, with obvious implications for the housing market.
And obviously, over the last year, housing demand has been extraordinary.
The big question is will an increase in interest rates dramatically impact that demand and potentially lead to property market problems?
Over the past year, I have written about the caution the team at Morton has seen from buyers. Our clients have been determined to find a property. They have been willing to pay good prices that represent strong value, but they have been very aware of the dangers of going too crazy.
I don’t see any reason for that cautious approach to change. Many in the market have been conscious the low-interest rate environment won’t last forever, and they are making choices based on that understanding.
That’s a crucial point. It means the growth in values to date has been considered and will continue to be so. It will hopefully mean a potential rise in interest rates has already been factored into property decisions and will therefore not automatically cause a significant movement in the market.
So, we will wait and see but I remain cautiously optimistic about the year ahead.