Early October has seen a third interest rate cut bringing the official rate to .75% a record low and is the third reduction in a matter of months. But what does the latest interest rate cut mean for property investors?
Multiple factors have been cited as the motivation behind the RBA’s third interest rate cut in a matter of months, including weak loan growth, low inflation, underemployment and a global trade war. For the non-professional property investor, it can be difficult to wrap your head around what the latest interest rate cut actually means. Understanding the ins and outs of the economy and interest rates is complicated and the issue of whether or not to be concerned is a legitimate one.
MAJOR FACTORS BEHIND INTEREST RATE CUTS
- WEAK LOAN GROWTH
- LOW INFLATION
- RISING UNEMPLOYMENT
- GLOBAL TRADE WAR
Why has the RBA implemented another rate cut?
Generally when a country implements an interest rate cut, the motivation is to stimulate economic activity to reignite job growth and reinvigorate investing. If the economy is stagnant, the central banks will often bring down interest rates giving the economy an artificial kick. However, if you aren’t following the changes closely you could be hit with unpleasant side effects.
How does the latest interest rate cut affect property investors?
Overall the latest interest rate cut is good news for property owners. The flow-on effect we are likely to see from the lower interest rates is higher borrowing capacity which will work in turn with the lower interest to lift prices. We have already seen this since June as the first two rate cuts have had an obvious boost on capital city house prices in only a few months of implementation.
In the majority of capital cities property rental yields remain at all-time lows even following the 2-year price decline. This is forcing investors to look to less typical areas to implement a positive cash flow strategy. The extra supply of apartments in the major capital cities is having a compound effect on rental yield and is seeing borrowers looking to purchase apartments come under increased scrutiny from lenders.
Is now the right time to invest in property?
The reality is you can’t overlook what the 2-year decline has offered buyers as far as affordability. The investment strategy that you are looking to implement in terms of building your portfolio will have a large effect on whether or not now is the right time to buy. A combined cash flow/ capital growth strategy means that you can definitely take advantage of the lower interest rate and rising markets but will be forced to look in less conventional areas to take advantage of such a strategy. The record low rental yield means that capital city markets like Sydney and Melbourne are not currently realistic prospects. Fledgling markets such as South East Queensland, Adelaide and to a lesser extent Tasmania seem to be offering more opportunity for this kind of strategy.
It’s undeniable that there exists a number of good investment opportunities in the current market. Although to truly take advantage of the low-interest rates it would be wise to shop around for the best mortgage rate or make sure that you’re working with someone who can do that for you. If you already have a large amount of mortgage debt using the lower interest rate to pay off more of your principal is a wise strategy.
The current consensus amongst industry experts is that we aren’t likely to see a reversal of the interest rates for quite some time and further cuts to .5 and potentially even .25 in 2020 are quite likely.
Is it a safe economic environment for investing?
Despite the concerns of a weak economy the necessity of property and a strong and growing market means that property investment will continue to be one of the safest options. Eased lending restrictions, the interest rate cuts, restored investor confidence post-election and renewed international interest are all likely to result in continually rising prices.
In conclusion, if you have a well-researched property, a strong strategy and a clear understanding of your long-term property goals now certainly could be a good time to make your next move.