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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!
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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.
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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.”