The impact of interest rates on the property market
Posted on Monday, September 05 2011 at 4:47 PM
With all the volatility in the sharemarket recently, there's been speculation interest rates could start to drop. But whether or not rates move in the near future, investors should already be armed with solid protection for their portfolio, according to Gavin Hegney of Hegney Property Group.
"The investors that are in the market should have risk management in place as to their current interest rate, how much is fixed and how much is variable," he says.
"At the moment fixed rates are half a per cent below variable. You might fix and think you're getting a good deal, but if interest rates come down one per cent over your fixed period, you're still only breaking even. So the fixed rates right now indicate interest rates will not only move down, but probably go down quite sharply."
Both results (a rate rise or fall) would have benefits, Hegney says. For example, a rise would mean inflation is kicking in and the economy is growing strongly, while a drop would mean more money in your pocket each week and more confidence for investors.
"There's plenty of scope for the Reserve Bank of Australia to cut rates to protect the housing market," says Hegney. "This is good for both the economy and politicians because it has a positive rub-off effect on mortgage holders."
JPP buyers' advocate Catherine Cashmore says rate rises or not, investors shouldn't hit the panic button because there won't be an immediate change in property prices.
"The property market is getting a very stable, secure platform for investors, who aren't enjoying the volatility of the stockmarket," she says.
"Because property is such a stable, tangible asset and because it's providing such a long-term platform, it's looking increasingly attractive to people over the long-term."
Even if there are cuts in the near future, she adds banks are already offering competitive interest rates.
"It's not going to make an awful lot of difference to what you're getting now," she says.
"Banks don't gamble and when they lower their fixed term rates, it usually means they're awash with deposits."
However, Christopher's Housing Boom and Bust Report, written by SQM Research managing director Louis Christopher, says interest rate cuts or rises could dramatically impact prices around the country.
"In 2012, if there's a 25 basis point cut in official cash rates, prices would likely bottom out and even post gains in some cities, as the property downturn eases and confidence begins to return to the market," Christopher says.
"However, if rates are left on hold, house prices are likely to keep falling well in 2012 with no market bottom until at least the middle of the year.
"Overall, it's unlikely house prices will crash in Australia over the short-term. Unemployment remains very low and nominal GDP (gross domestic product) is growing at a robust pace, being pushed along by the commodities boom and strong growth in nearby Asian economies, including China."
