High interest rates a benefit for investors

What will happen if rates go up? In today’s low-interest-rate environment one of the common questions property investors ask is, “What happens if we buy now and interest rates skyrocket, like back in the 1980’s?”

An understandable concern and today’s historically low interest rates can’t be sustained forever because at some point the economy will begin recovering, inflation will grow and rates will rise!

That’s the economy’s cyclical nature for you.

When rates do rise it’s doubtful they’ll hit the dizzying heights of the late 1980s. The major lenders certainly don’t think so; they’re setting their 10year fixed rates about 7per cent.

With vast resources and access to the world’s top economic minds, it’s highly unlikely that major lenders will make the wrong call about the future direction of interest rates.

But for argument’s sake that they do and rates climb back to the heady levels of 20 years ago.

If interest rates go up that far it’s a sign that business and consumer confidence is high. When rates go up so does inflation. And when inflation rises, so do property values. Yes, your holding costs will be higher because of higher interest rates but as an investor you will benefit on three fronts.

High rental returns

First-home buyers won’t be prowling because property is less affordable in a high-interest-rate environment. This will keep them in the rental market, put pressure on the available rental accommodation and drive up asking rents. The higher the interest rates the higher the investment yield!

Negative gearing benefits

If your expenditure on the property exceeds your rental income, you’ll be able to soften the impact and increase your cash flow by claiming the difference as a tax deduction.

Substantial sale proceeds

If you can’t afford to hold the property you can sell it. Whilst not an ideal scenario, your property will have grown substantially in value during the time of high inflation so you’ll be better off than when you purchased it and that is the aim of investing!

High interest rates a benefit for investors

First homebuyers improving rental vacancies

Melbourne’s outer suburb vacancy rates have improved from 0.7 per cent to 1.8 per cent in the past six months, according to the Real Estate Institute of Victoria’s April vacancy rates.

Vacancy rates across Melbourne are reasonably steady having been between one and 1.4 per cent for 12 months.  However it‘s significant that there’s a noted improvement in the outer suburbs.

The improvement could be due to the number of first homebuyers moving from their rented accommodation into their own homes with the assistance of the grants, bonus and boosts.

The March quarter median prices showed that most of the activity in the marketplace has been in the outer suburbs; for instance Craigieburn, Melton South, Hillside, Epping, Caroline Springs, Werribee and Meadow Heights – all outer suburbs of Melbourne very popular with first homebuyers.

It‘s great news for renters if a by-product of the grants, bonus and boosts is an improvement in availability of rental accommodation, however monitoring of the situation over the next few months will tell of any continual improvement..

We’d consider that the rental market would be in balance once we reach a Melbourne-wide vacancy rate of three per cent.

The last month’s REIV members figures have shown a very minor change in the inner suburbs where the vacancy rate moved from 1.5 to 1.3 per cent and in the middle suburbs where it moved from 1.4 to 1.3 per cent.

Investors …waiting and watching!

It’d seem the stars are aligned: low rates, population growth, low vacancy rates, strong rental market and a shortage of housing in the majority of capital cities.

Since the latter 2008, the number of loans to first home buyers has outweighed substantially those to existing owner-occupiers and investors as first-time buyers rush to take advantage of the increased government grant. These numbers are set to surge in the next two months after the Prime Minister indicated that the increased grant will end June 30. In previous interest-rate cycles, lending to investors and existing home buyers increased alongside that to first-home buyers.

Partly,  the reason is that investors aren’t getting the first-home-owner grant, and when you’re laying your own money down instead of the government’s, you tend to think more carefully before deciding to take the plunge. Unemployment concerns and fears about how the economy will evolve this year are also key reasons why investors are not yet entering the market.

Consumer sentiment figures released earlier this month by the Westpac-Melbourne Institute Survey found pessimists still outnumbered optimists and, with the prospect of more unemployment, that’s unlikely to change anytime soon.

Interest rates are one of the crucial aspects investors consider. During the past month or so, several of the big banks have increased their fixed mortgage rates, even though variable rates are expected to go even lower.

Banks say it’s because of an increase in the rates in the wholesale market where they access funds. Not everyone accepts that that is the reason, but most acknowledge it’s a signal borrowing costs are near their lowest levels!!

Some economists believe fixed rates will continue to rise as banks manage their risk, and it’s just a matter of the speed at which it happens. Of course, fixed rates are not popular at the moment even with investors who traditionally use this option.

That’s not a surprise, given the cash rate is expected to fall to 2 per cent by the end of the year.

But fixed rates are a bit of a barometer of the longer term trend in interest rates, so they’re worth watching. It also pays to remember that just because the Reserve Bank of Australia cuts rates’, that doesn’t mean banks have to follow suit.

Only time can tell, whether or not property buying will be better next year!

Perhaps investors are waiting for a sign that unemployment will stop rising, or for first-home buyer activity to dry up!

Renters …get ready to BUY!!

Increasing rents boosted the housing component of the Consumer Price Index (CPI) by   0.9 per cent for the quarter and the overall annual increase to 5.5 per cent, that’s according to  Australian Bureau of Statistics figures released this week.

The CEO of Real Estate Institute of Australia has said, “The majority of this increase in the housing component was driven by rents, which increased nationally by 1.7 per cent over the quarter and 8.4 per cent over the year. The cities where rents increased the most were Perth and Darwin with annual increases of 10.9 per cent and 13.5 per cent respectively!”

This rent increase in the recent quarter reflects low vacancy rates and the scarcity of rental properties across capital cities, combined with the decrease in building approvals and housing finance for investment.

The National Rental Affordability Scheme should hopefully relieve this figure, however the impact won’t be felt for quite some time.

“With an underlying demand for additional housing at around 200,000 dwellings per year and commencement of new dwellings of 147,000 in 2008, Australia will need to build significantly more houses than what has occurred to meet rental demand.”

Housing affordability improved since the Reserve Bank rate cuts,although there’s really been very little   flow-on benefit to those in the rental market.

“With lower interest rates and greater affordability, now would be the time for those in the rental market to consider the purchase of their own home.”

RBA slashes interest rates