Revised Discussion – Will interest rates kill the market?

In April this year, we discussed the impacts of RBA interest rate changes, now with several more increases to the cash rate, the underlying message for property has remained the same. This discussion below is timely to discuss again.

Australians are an interesting lot. When it comes to important issues deliberated around the kitchen table, there are some tried and true discussion starters. It could be about the effectiveness of our political leaders, or which sporting franchise is up the proverbial creek without a paddle.

But another constant source of discussion is interest rate movements – and like amateur epidemiologists during the pandemic, everyone seems to have an ‘expert’ option on the subject.

This is now a particularly hot topic of course. Inflationary pressure has seen shots fired across the bow by the Reserve Bank, and people are beginning to panic as interest rate rises arrive.

But dig a bit deeper before you run away screaming, “We’re all doomed”.

The real question is, “Will rising interest rates kill the real estate market?”

To me, the answer is no, and here’s why:

 

Confidence indicator

Rising interest rates are a big lever pulled by the RBA to help control inflation. Given inflation is increasing strongly in this post-pandemic world, there’s every reason to expect interest rates will continue to rise in the coming months.

Firstly, the threat of rising rates often does much of the work before an increase comes in.

You see, telegraphing the change has the effect of cooling everyone’s heels. They are expecting the rate to rise further, so they are already factoring it into their household budgets. They’re looking for better lending deals, cutting costs as needed and building in buffers. As rising rates hit, don’t expect them to immediately gut our economic strength.

 

Lots of savings

One unexpected pandemic result was the extraordinary level of ready funds Australians squirrelled away.

Many Aussies, rightfully fearful of their future, started saving furiously. This was assisted by less spending on travel and socialising.

The result is that many of us now have plenty of savings on hand. This buffer will help buy time for property owners as they settle into rate increases.

 

Property as a hedge

Here’s something all too rarely discussed. Well-chosen property is an excellent hedge against rising inflation and interest rates.

Think about it. A good quality property investment will probably deliver average capital growth of around five per cent per annum. On top of that, there will be a net rental return of something like two to three per cent after costs.

The bottom line is property can deliver a total return of seven to eight per cent as an investment. Even in the worst-case scenario, we’re unlikely to see interest rates go anywhere near that figure in the foreseeable future.

 

Rates won’t keep rising

Interest rate rises will reach a balance point sooner than most expect, and then stop.

Rate rises have been a bit bigger than most of us predicted early in 2022, but they will do the job sooner than a drawn-out increase process.

At present most mortgages are still on a sub-four per cent interest rate. Rate rises won’t elevate those suddenly into double digits, so most borrowers will be able to tolerate the move.

In conjunction with that, smart investors will already have an interest rate buffer in their home budgets. I’d encourage clients to assess their own borrowing tolerance at double the interest rate they’re currently being charged. That means they have plenty of room to weather further rate rises.

 

Robust banking system

Australian banks already have rigorous lending criteria. We had a healthy banking system before The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, but once that was handed down Australia’s lenders became even more cautious around lending decisions.

Borrowers who qualify for a loan must go through an extensive assessment before being granted approval. In addition, banks must now assess their clients’ applications based on a three per cent tolerance rate buffer. This means the bank runs every potential borrower’s financials assuming their loan’s interest rate is three per cent higher. If the numbers don’t stack up, the loan probably won’t be approved.

All this says our nation’s rules on who qualifies for a loan are stringent, so those holding mortgages will already be well placed to deal with near-term interest rate rises.

 

So, before all the ‘chicken littles’ out there start screaming about the sky falling, take a pause and think about it. Rising rates may be here, but don’t expect a mass selloff of property. Demand for good quality investments remains high among buyers… and even higher among tenants. If you secure the right real estate now it will continue to perform strongly well into the future, whatever may come.

Always review any property location research and investment analysis data, with a professional, QPIA (PIPA Member) qualified & accredited ASPIRE Property Advisor Network Advisor. Never rely on glossy sales brochures or property marketing information, ensuring a property is right for your strategy. Property Investing is about BUYING a property that matches your goals and aligns with your investment strategy, never be SOLD an investment, know your numbers!

Visit www.aspirenetwork.com.au or call our office to be connected with an accredited and independent Property Investment Advisor on 1300 710 933

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