Interest rates are not driving the current property boom!
We have seen the Reserve Bank of Australia increase the cash rate over two consecutive months. This increase has come quicker than anticipated. It is crucial to be mindful of where you are getting your information and data from.
The mainstream media are a bunch of pelicans and spreading misinformation.
This information creates fear, doom and gloom to get views. Individual organizations will release information that will draw eyes and attract free publicity. A vicious cycle of other journalists then rewriting this information to generate the same doom and gloom for views. Very similar to them projecting all the negative sentiment around Covid, once everyone was sick of that they had to move on and target something else.
The media started to make this negative noise in February 2021. If you were to listen to what they were saying and made the decision not to purchase, you would have missed out on massive gains in the property market over the last 16 months. They stated ‘The property boom has ended’.
May 2021 they stated ‘Housing boom slows as waves of homes hit the market’, ‘Signs of cooling in home frenzy as price growth slows’ ‘The pace of growth loses steam in April’. The list of this goes on, yet throughout all this noise certain markets have continued to perform and do anything but what the media are saying.
Factors I keep banging on about:
- Lenders asses a borrowers lending capacity with a 3.00% buffer on the interest rate they receive for the applicable product. i.e if the rate is 3.00% they are assessed with a 6.00% interest rate.
- Vacancy rates are at historic lows, for investors this means they have experienced between 20-30% increases to their rental income in the last 12 months, mitigating a rate rise. These rises will be expected to continue due to the low vacancy rate environment.
- Borrowers where their properties have seen large growth in their portfolio can negotiate a lower rate has their overall Loan to Valuation Ratio has decreased. Lenders offer lower rates for a lower LVR position due to the risk being lower.
- Australian’s have historic high savings off the back of the last two years of covid. Therefore, having higher than normal cash buffers in place means many borrowers are up to 2 years ahead on their payments.
- Investors are typically able to claim the interest as a tax deduction for an investment property (you should speak with your accountant)
ANZ report in April 2022 stated ‘We expect unemployment will continue to fall reaching a low of 3.3% later this year. We expect wages to continue to accelerate… That means the impact of higher interest payments will be offset by higher household incomes’
‘Interest rate hikes do not always lower prices. House prices rose by more than 50% during the tightening cycle of 2002-2008 – or an average of 8% per year’
‘We expect any correction in housing prices to be a moderate one, especially when compared with the rapid housing price growth over the past two years’
‘70% plus of our mortgage portfolio is ahead of repayments. People behind on their home loan are just 0.7%. A third or all ANZ mortgagors are 2 plus years ahead’
‘Household savings and small business savings are at record levels. People have put money aside for a rainy day. They’ve paid down their most expensive debt. Credit card balances are way down’
‘Even the most vulnerable borrowers (those who took out a loan when interest rates were record-low) would be able to absorb that comfortably (3% buffer)
If we take a look at the period of time between 2002 and 2008 this will showcase that interest rates DO NOT affect price growth. It’s also important to note we are in a similar time period now as between 2002-2008 as per the 18 year property cycle.
Price growth is created from a variety of factors, not just one factor alone being interest rates.
Interest rates between 2002-2008 increased 22 times, from 6.3% to 9.5%. Throughout this period whilst rates were rising property growth occurred in many regions and capital cities.
4 of the capital cities growth listed below between 2002-2008.
- Brisbane: 127% capital growth
- Adelaide: 103% capital growth
- Melbourne: 66% capital growth
- Sydney: 26% capital growth
Looking back over the past 50 years it’s important to analyse past interest rate cycles and growth cycles.
Interest rate rises were extremely common throughout the 1970s and 1980s. We’ve all heard people talk about how they were paying 17% interest rates in the 80s.
The standard variable rate home loan rose from 6.5% in 1970 to 17% in 1990.
Although rates were increasing fast between this period the median home value increased in every location across Australia.
The cost of the standard house in Sydney increased from $18,000 in 1970 to $147,000 in 1990.
Hobart increased from an average of $11,000 to $83,000.
Price growth is driven by multiple factors and not just interest rates. Here is a list of factors below contributing to the boom:
- A stronger than expected economy
- Lower than predicted unemployment
- State and federal stimulus measures
- The build-up of savings during the pandemic
- Historic low vacancy rates, pushing rents and prices higher
- Pent up demand leading to rising sales activity
- Low listing levels in comparison to rising buyer demand
- Exodus to affordable lifestyle
- Increased infrastructure spending
- Return of ex-pats to Australia in large numbers – This creating a further increase to demand
- Belated entry of investors to compete with owner occupied properties
- The recent uplift from foreign buyers (Australia is a safe haven)
- Safety of bricks and mortar (less volatile then crypto/shares)
- Low-cost finance
Reasons that will generate more pressure and see the boom continue:
- Continued spending on infrastructure
- Return of investors to the market in large numbers as well as foreign investors
- Reopening of international borders and resumption of overseas migration to Australia in addition the return of international students
Those who can take a holistic approach and look at all factors and block out the noise that mainstream media are projecting will take advantage of the massive opportunity right now!
If you want to take advantage of this market and purchase a high quality investment property, please reach out to us at info@tayloredpropertywealth.com.au and we would love the opportunity to see how we can help you on your property journey.
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