Here’s Why Investors Shouldn't Fear Increase in Interest Rates

In recent months, there’s been plenty of talk about rising interest rates and what impact that might have on house price growth.

While higher interest rates do mean higher repayments, there are also a number of other factors that most people are overlooking when it comes to the impact on house prices.

At the last RBA meeting, Governor Phillip Lowe made it clear that the board will not be raising rates quickly and will do everything to encourage ‘highly supportive monetary conditions.

The belief of the RBA is that while inflation is currently sitting at 3.5 per cent, which is slightly above the target band of 2-3 per cent, much of the price pressure is the result of supply chain disruptions. Something that Lowe believes will ease in the future.

What Happens When Rates Rise?

While the exact timing of a rate rise is still yet to be determined, it’s important to look at is what happens when interest rates do actually rise.

The last time the RBA increased the cash rate by 1.75 per cent between September 2009 to December 2010, national house prices actually increased in value by 10.5 per cent.

From June 2007 to March 2008 the cash rate increased by 1.00 per cent and house prices increase by 8.9 per cent.

Between March 2006 to December 2006 the cash rate increased by 0.75 per cent and house prices increased 8.4 per cent.

As we can see, just because interest rates are rising, doesn’t mean they will slow down house price growth on a national level. Theoretically, rising interest rates are a sign of a healthy economy and typically that leads to the house prices growing.

Rate Rises Factored In

If and when the RBA do decide to raise rates, the expectation is that they are only going to be able to raise interest rates by 1-2 per cent. And these rate increases are already well factored into the market in any case.

If you’re going to take out a fixed-rate mortgage, we’ve already seen mortgage rates rise to around 4 per cent. According to the ABS, around 50 per cent of loans taken out in the past 12 months have been at fixed rates, meaning a large portion of the market won’t be feeling any pain in the short term, should rates rise.

Similarly, APRA has already made it a requirement that new loans are assessed with a higher ‘buffer rate’. Meaning that loan applications are to be assessed at 3 per cent above the underlying interest rate. That means that many of these new loans that are being taken out shouldn't be under financial pressure should interest rates start to rise. They’ve already been factored in.

Rising Rents

While rising interest rates will lead to higher costs for borrowers who aren’t on a fixed-rate loan, it’s also important to factor in the impact of ever-increasing rents.

Over the past 12 months, we’ve seen rents rising across the country by around 10 per cent according to CoreLogic.

If rents are to continue to rise at this sort of rate, the increase in income is going to be able to help offset the higher borrowing costs. This is a big advantage for investors.

In the property market at the moment, we’re continuing to see big discrepancies in the level of growth between the different capital city markets and regions. While growth is stagnating in Sydney and Melbourne, places like Brisbane and Adelaide continue to power on.

Locations where supply remains tight and demand is strong will still see upward pressure on prices regardless of small interest rate rises.

While the cash rate will eventually rise, for savvy investors there are always going to be opportunities to find properties that will outperform the broader market and do well in all market conditions.

If you’re looking at investing in residential property feel free to get in touch and discuss your goals and the best way to manage a changing interest rate environment.

Your Takeaway

If you are looking for an opportunity to buy an Investment Property, then look for volatility in the market and Interest Rates are one of the key metrics that make the market move.

To grab the opportunity without compromising on your schedule and weekends, arizabuyersagency.com.au can help you in your next property investment journey.

Reach out to us at our email address helpme@arizabuyersagency.com.au or visit our Contact Us page for a Free and No-obligation callback.

Happy Investing!