Interest rates are super-topical at the moment. While yesterday’s RBA rate pause provided some relief to households, it’s important to consider the bigger picture. With 12 rate rises since May 2022, and the likelihood of more to come, homebuyers and potential investors are contemplating whether now is the right time to get into the property market.
Many of our clients are asking whether now is the time to buy, or wait until interest rates drop before getting into the market. In this article, we will delve into the factors while waiting for interest rates to drop may seem like a prudent strategy, there are compelling reasons to consider buying now.
|Maybe some counterintuitive thinking is required. Investing legend Warren Buffett put it very well when he said:
“Be fearful when others are greedy, and greedy when others are fearful”.
If you can act when there’s less competition in the market, you can get a good deal on the purchase as opposed to when there are more buyers.
With the recent rate increases dissuading some buyers, entering the market during this period of reduced competition presents an opportunity to negotiate a more advantageous purchase.
Let’s look at a couple of other key reasons to consider buying now:
Cash Flow and Compound Growth
Even if we assume purchase prices don’t drop by much, smart investors understand the benefits of cash flow and compound growth (i.e. growth on top of growth). The longer you hold a property, the greater the overall return on investment.
By entering the market sooner, you can start benefiting from cash flow generated by rental income and take advantage of the compounding effect of property value appreciation over time.
Supply and Demand
We all know that supply and demand is what drives growth in the property market, and if you wait until the interest rates come down or the cost to hold a property is less, the chances are other potential investors are thinking the same thing. This increased demand could result in fewer opportunities for good deals in the future.
From a cashflow perspective, we’re in a rental crisis and this is not a problem that will be resolved quickly.
By entering the market today, you can tap into the demand for rental properties, even if the holding costs might be slightly higher due to prevailing interest rates. Rental growth of at least 10% over the next 12 months is expected, making it an attractive time to invest in properties with rental potential.
Understanding Property Market Cycles
We’re assuming that house prices will go up, and while we don’t have a crystal ball, we have been investing through multiple property cycles over the past 40 years. That’s why you need to understand the difference between top-down cycles and bottom-up cycles.
Top-down cycles are driven by cheap money, low interest rates and market sentiment. While this cycle can propel the market upwards, momentum can also come to a halt, as we’ve seen in the past 12 months. Currently, the market we’re in is a bottom-driven market where prices at the affordable end are pretty robust.
For many renters, who have seen rents rise between 10 and 20% in the past 12 months, their motivation is to become a homeowner. The challenge is how to save the deposit needed, and they’re going to be looking at every single government grant possible, such as first home buyer grants. That affordable end of the market is where the demand is going to be, and it will continue to push prices up from the bottom.
We don’t expect to see property price crashes because we’re undersupplied, and we’ve got a rental crisis that’s motivating people to buy in the affordable price bracket. It’s why the top quarter has come down in price, but the affordable end – where we focus here at OpenCorp – has stayed strong despite record interest rate rises.
It’s important to remember that comments in the media about “house prices are going backwards”, that doesn’t mean every house has lost a large percentage of its value. It’s just a by-product of those top-end houses not being put on the market, and therefore not contributing to the median price.
When deciding whether to buy an investment property now or wait for interest rates to drop, it’s important to consider both short-term and long-term factors. While the recent rate pause by the RBA provided some relief, the overall trend of rate increases suggests a shifting lending landscape.
Individual circumstances and investment goals should guide the decision, but the current market conditions suggest that now may be an opportune time to enter the property market.