Stop worrying about interest rates - February 2019
February 27, 2019 / Written by Rich Harvey
It’s the first Tuesday of the month, just after two o’clock in the afternoon, when millions of eyeballs collectively turn to television screens and news websites.
Some may know with almost absolute certainty what the announcement will be while others hold their breath briefly in anticipation to see if the Reserve Bank of Australia has lifted interest rates, dropped them or, as they have for a long while now, left them on hold.
When it comes to the state of property markets in Australia, conversations lately have centered on three main things – what prices will do this year, how the election might impact things and whether the cash rate, and therefore mortgage interest, will inevitably rise.
Naturally, you expect lots of questions about softer house prices in some cities – particularly Sydney and Melbourne – driven by fewer buyers and lots of media-driven jitters. And the upcoming federal election is important too.
But interest rates… who really cares?
Here’s why it shouldn’t matter to property investors and where you must really focus your attention.
Going up or down again this year?
Firstly, let’s consider where things sit with the Reserve Bank and its setting of the country’s official cash rate.
The rate has remained unchanged at the historic low of 1.5 per cent since August 2016 and through most of 2017 and 2018, conventional wisdom indicated that the RBA would have to increase it sooner rather than later.
The consumer comparison website finder.com.au surveys 28 top economists every month and for the past two years about 80 per cent of them believed a hike was imminent. Last month, that figure was less than 40 per cent.
That’s quite the slump. Essentially, the economy needs rates to stay low to keep powering along. The property market has seen fairly hefty falls. Unemployment is stable but there are nervous signs. And cost of living is high.
So, the likelihood of a rate increase seems unlikely in the near term. In fact, 60 per cent of that group of fiscal boffins now expect a rate cut this year. One believes it will happen next month.
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Does it really matter?
Way back when the cash rate was high, the monthly meeting of the RBA was one that property investors watched closely. A reduction was celebrated, delivering a much-needed cost saving in mortgage repayments.
And when the rate rose, it was a game of watch-and-wait, seeing which banks moved first and who went above and beyond the RBA’s increase.
But now, with mortgage interest rates being so incredibly low and the housing market being as soft at it is, why are we still obsessing over the monthly meeting? If they go up or down, does it really matter?
Instead of interest rate movements, there’s a much more crucial conversation we should be having. And that’s finance.
Getting a loan is the focus
What does it matter whether there’s a modest reduction in the RBA’s cash rate if property investors continue to struggle to source finance?
Banks were given a walloping by regulators last year that saw them overhaul lending practices and take a much more cautious approach to lending. Overly cautious really. Anyone trying to get a loan was faced with all manner of new hurdles, incredibly lengthy delays and, in many cases, decisions that didn’t reflect reality.
The Banking Royal Commission recommendations delivered another reason for lenders to clamp down. How those recommendations are implemented could see things tighten further, at a time when property markets need difficulty like a hole in the head.
So, that RBA decision on the first Tuesday of each month doesn’t matter much, does it? The primary consideration for would-be investors should instead be on jumping those hurdles.
What’s one of the major things that puts a bank’s mind at ease when it comes to approving real estate finance?
The quality of the investment.
A property with excellent fundamentals bought at a reasonable price and with strong future prospects is a huge deal sweetener when loans are being considered.
In current markets, finding that kinds of investment is trickier than ever. It’s why you need a qualified, independent and savvy expert to seek out diamonds in the rough and secure them for you at the best possible price.
A buyer’s agent should be part of your arsenal. A buyer’s agent who is on the ground, knows where to look and what to seek out, and can work within your parameters as an investor, is worth their weight in gold.
Paired with a good finance broker, they can anticipate what banks these days demand and make the entire process seem like a pleasant day dream when everyone else is in the midst of a nightmare.
But it can tell us something
The fact that the RBA is now likely to cut rates this year might not make a huge difference in the fiscal scheme of things for investors, but it does serve one purpose.
It indicates markets are nearing their bottom. And we know from examining every single other property cycle that what goes down always comes back up again.
Plateauing property prices in markets that have softened will mark the start of a recovery. Fundamentals for growth are still there – strong population gains, a shortage of supply, low new construction starts and ongoing demand for accommodation.
Property has had a rough 18 months, particularly in Sydney and Melbourne, there’s no denying it. But it will come back and – based on the views of many economists – the road to recovery might be closer than you think.
Savvy investors who know to buy when everyone else is sitting on their hands, and especially at the bottom of a market before the uptick begins, are in a fantastic position to make the most of bargain buying.
But you need to be in the best possible position to snap up the right property, at the right price. To do that, you need to put lenders at ease that it’s a good bet. A buyer’s agent can make that happen.
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