With booming property prices mixed with concerns about interest rates, many people may be asking themselves “is now a good time to invest in property?”.
Australians have enjoyed a sustained period of record low interest rates recently. But how will talk of possible rate rises affect current and future property investors?
It’s important to read beyond the headlines. If you do, you’ll discover that the rates which are rising are mostly the 3, 4 & 5-year fixed rate loans, in line with the Reserve Bank’s prediction of rates beginning to move up in 2023. Variable rates are not currently rising, nor are 1 and 2-year fixed rate loans.
But remember too, that over the past 40 years, interest rates for investors have averaged around 6.5-7.0%. A rate of 2% is less than one third of that, so rates are still at record lows.
Also, as a property investor, the banks will always assess your ability to service a loan for an investment property by adding a safety margin of approx. 3% to your loan rate. (That’s to protect them.) So, if you apply for a loan at 2%, they will assess your capacity to repay the loan as if you were borrowing at 5%. If the banks think you can afford to service a loan at 5% interest, even if your rate goes to 3%, it is still below the margin they are comfortable with, so you should be too.
What factors influence the rise and fall of interest rates?
Have you ever wondered what factors influence the rise and fall of interest rates and how do they affect property investors?
To find the answer, look beyond the headlines. Always ask yourself “why are they rising?”
Generally, interest rates rise when economic activity improves. As the economy grows, job creation improves and wages rise. As this happens rents rise and the value of investment properties actually increase.
As a property investor, if you are earning more income from rent and getting additional tax benefits as well, you may end up paying just $20 a week more in mortgage costs with a small rate rise. But if you are holding an investment property that has recently risen in value by $200,000, would you really be concerned about paying that extra $20?
Rate rises negatively affect homeowners much more than property investors who have additional benefits to offset the rise. So, rate rises are actually good news for property investors. Making now a good time to invest in property.
Has Covid produced a property bubble?
Like almost everything else, the price of property is determined by supply and demand. Always has. Always will.
During Covid, some Australians’ income was severely affected if they worked in tourism, hospitality, etc But, for many others, Covid meant their income kept coming in AND their expenses went down. People couldn’t travel, go on holidays, dine out or spend money on other discretionary things. That meant they had more disposable income.
So many people’s interests turned to property. With more spare money to spend, Australians started wanting to upgrade their houses, but not many other people were selling so supply has been really low.
Lots of people wanting to buy property, not many properties available, equals prices going up as demand exceeds supply.
But property prices reported in the media often reflect what homeowners are paying. Investment properties can be in a different category. Record low interest rates have improved affordability by 40% since 2017. However, we haven’t seen price growth of 40% over the same period so investment properties currently still represent exceptional value.
There has been considerable price growth in property prices in 2021, have investors missed the boat?
Never look at averages as a property investor. While median prices for cities are in the news, a closer look reveals a different view.
There is no “one size fits all” approach for capital cities. There are different fundamentals driving the market in each city – supply & demand, affordability, rental yields and vacancy rates all differ between Melbourne, Sydney, Brisbane and Perth for example.
Within each city there are certain sub-markets, areas that present unrealised opportunities, especially those on the fringe of the suburbs that are booming.
Vacancy rates have a big impact for investors. When the rental vacancy rate falls to less than 1% (as it has in one capital city over the past 2 years) people will pay more rent as demand grows for limited rental properties. This is great news for investors.
Should investors be looking for bargains in the regions?
“Bargain” properties in the regions can look appealing but if they don’t have the job growth in the area surrounding them, that often explains why they seem cheap.
Too much supply also drives down prices meaning there’s not enough demand. Without a major population to support long-term growth in the value of investment properties in the regions, cheap properties often stay that way… cheap! You just don’t get the capital growth and increase in rental income from regional properties.
Investment properties in major population centres like cities, are always a better long-term investment.
Is now a good time to invest in property or should I wait?
No one ever makes money from property investing by waiting. If you don’t have a property in the market, you can’t be making any money from it. Trying to “time” the market is everyone’s dream, but it rarely happens.
There is never a “perfect” time to invest. You should invest, when you can, hold it for the long term and don’t get caught up on trying to “time” the market.
Think about where you live right now. If 30 years ago someone had offered you an opportunity to invest where you live, would you have taken it if you’d known that ahead of you lay these things:
- Removal of negative gearing
- Restoration of negative gearing
- The Recession
- The Asian Financial Crisis
- The GFC
- Sept 11, etc
Long-term property keeps performing despite all these events. And will do so whatever the future holds.
How can potential investors save for a deposit when rates are low?
Trying to save for a deposit can be a challenge when you don’t earn much interest from a bank.
But there are ways to grow your deposit while gaining immediate access to the growth occurring the property market right now.
One clever way is a residential property investment fund, like ResiFund.
This fund lets you invest in residential properties and earn money on their growth in value and improved rental returns. It also can operate like a savings plan, allowing you to contribute on a monthly basis so you don’t end up with a deposit that isn’t growing and feeling frustrated that the market is moving further and further away from you.
Why can’t I just invest in property myself?
Trying to invest in property on your own can be a huge challenge. There is so much work to do to research the market, choose the right property, apply for finance, then find the right property manager.
It is a huge task that is often daunting and overwhelming. Many people try to do it themselves and either give up or make mistakes, they miss great opportunities.
Finding property experts who have a proven model backed by long-term experience in delivering excellent returns on investment property is a much wiser strategy. It doesn’t cost anything to have a conversation with them and tap into the knowledge, expertise and experience of people who have made a success out of property investing.
OpenCorp offer a full suite of services to property investors allowing you to achieve your goals through our “one-stop” shop. Our team of experts include research and analytics experts who study the market for opportunities; property advisers to help find the right properties; mortgage brokers to help you get finance; and a property management team to help you manage your investment. We can help you achieve your financial goals through property investing.
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Note: We are not builders, developers or real estate agents. We are property advisers.