Courting an investment opportunity, but it’s giving you mixed signals? Don’t worry; it’s not you. It’s the market. Despite record-breaking streaks, the real estate market is predicted to see falling property prices and rising interest rates over 2023, hitting investment property mortgages the hardest. Markets are hedged on the cash rate - which has thrown the housing market into a tailspin. The good news is that investors can break into the market with less capital. The bad news is that one wrong move may lead to a cash leech or debt cycle. In this piece, we’re looking to the experts on the current market conditions, what’s causing this flurry of activity and what impact this could have on your current (or future!) property investments. The Changing Landscape of The Australian Property Market Investors will face two key challenges in 2023: increasing interest rates and declining property prices. Consistent market fluctuations throughout 2022 meant investment avenues were repeatedly coming up hot and cold. Although financial experts agree that the rate of change is gradually slowing down, investors would do well to keep a tab on these two ripple-effect triggers in the future. Rising Interest Rates As of February 2023, the Reserve Bank of Australia (RBA) has increased the cash rate to 3.35% - the highest since 2012 and Australia’s 9th consecutive cash rate hike since March 2022. So why the sudden upsurge in numbers? What’s Causing Rising Interest Rates? To break it down simply: inflation. In 2022, Australia's annual inflation rate hit 7.8%, the highest since 1990. Although this figure exceeded many economists' forecasts of around 7.5%, it was consistent with Treasury predictions that inflation would peak at about 8% in 2022. In response, the Reserve Bank of Australia raised interest rates to curb rising inflation. While higher interest rates make it more expensive for businesses and individuals to borrow money, it can slow down spending and help manage inflation. But how do interest rates affect property values? As interest rates rise, future income becomes less valuable, and borrowing conditions tighten, affecting the current value of residential and commercial properties. Forbes Advisor reported two main contributing factors for this upsurge in numbers: Demand shock Demand shocks occur when the demand for goods or services changes suddenly and unexpectedly. In the case of Australia's current inflation, the pandemic, lockdowns, and restrictions had people spending more time at home, which led to an increased demand for durable goods and home renovations. This sudden surge in demand caused a supply shortage, leading to price increases, and contributing to inflation. Here are a few cases of demand shock we saw over the pandemic: Home renovations and improvements: The Australian Bureau of Statistics reported a 2.7% increase in construction activity in the September 2021 quarter, with renovations and alterations accounting for much of the growth. Electronic goods and entertainment equipment: A global shortage of semiconductors has resulted in supply chain disruptions and price increases for electronic goods. Cars and automotive parts: Pandemic-related supply chain disruptions have resulted in a shortage of new cars in Australia, with many dealerships experiencing increased demand for used cars. Travel and accommodation: The domestic tourism industry in Australia has seen a strong recovery in the wake of the pandemic, with an 11.5% increase in domestic travel spending over 2021-22. Supply shock: Unexpected disruptions in the supply of goods or services are known as supply shocks. The pandemic played a big role here, with lockdowns resulting in the sudden closure of many factories, causing massive supply shortages. Several ships were also pulled out of service during the pandemic, causing a 400% rise in shipping rates. In addition, the unforeseen Russian invasion of Ukraine further strained supply chains, bumping up oil, food and gas prices to staggering highs. Here’s a few cases of supply shock we’ve seen over the last few years: Building materials: With disruptions to global supply chains and increased demand for home renovations, the price of building materials in Australia increased significantly, with lumber prices surging to record highs. Semiconductor chips: As we mentioned earlier, the global shortage of semiconductor chips affected the supply of electronic goods, including cars, leading to decreased production and increased prices. Food and agriculture: Disruptions to global food and agriculture supply chain caused by the pandemic resulted in shortages and price hikes of certain products in Australia. The price of rice increased by up to 30% due to panic buying and hoarding in the early stages, coupled with reduced production in major exporting countries. Energy: In 2021, Australia experienced a cold snap that led to a surge in demand for natural gas used for heating. Increased demand and supply chain disruptions caused natural gas prices to skyrocket. The increasing costs of sustaining business have resulted in rising prices for customers. Many Australians have felt the squeeze by having to cut back on essentials and living standards. Some may be feeling the brunt of the blow even more. With the lockdowns wiping out numerous livelihoods, many were forced to dip into and often use up their life savings. The wage drop of 2.7% has also contributed to the fiscal tightening. This has resulted in fewer mortgages being taken out all around.