The RBA has just lifted interest rates
for the third month in a row, and for
the sixth time in 8 months.
This is certainly rapid fire, although
we are not sure that the whole economy
should be affected through higher interest
rates simply because mineral exports are
booming, and house prices are rising.
With a cash rate of 4.5 percent, the
RBA regards this as a ‘normal’
level when looking back over the past
10 years. The step has been taken to get
away from the ‘emergency’
rates we have seen, and to keep inflation
in check.
Does the rate rise make sense? I’m
not so sure. For example, retail spending
is down. The impact of all the growth
is heavily skewed towards the miners and
banks. And the 20 percent rise in house
prices over the past year has more to
do with lack of supply than runaway demand.
So what should we make of it all? Is
this still a good time to be taking on
more debt for investment? We believe so,
for a number of reasons.
• Firstly, we should remember that
interest rates are still 2 per cent below
their mid-2008 peak.
• Secondly, there are reasons to
suggest that this will probably be the
last increase for a while.
• Thirdly, provided you are taking
on ‘good debt’, e.g. to finance
an investment property, the increase in
property value and rental price hikes
should be sufficient to cushion the effects.
We need to remember that interest rates
move up and down in a cycle that will
change many times over the life of a long-term
investment like property. Seasoned investors
are out there in the market buying in
growing numbers. Right now, 31 per cent
of all property sales are to investors.
They realise the effect of interest rate
increases can be passed on to tenants
given the extreme shortage of rental accommodation
in most capital cities.
This is an important factor. Unlike your
family home where you face the mortgage
bill alone, investment property will bring
rental contributions from tenants and
tax concessions from the government to
offset mortgage costs.
In summary, if your instinct is to use
the rate rises as a reason to defer investment
decisions, we would argue to the contrary:
- Interest rates are now simply ‘normal’
- They will go up and down over time
- The outlook for the property market
is exceptionally strong given the lack
of supply, and the record population
growth.
- Increased costs can be passed on.
Think of it like this: if every 0.25%
increase on an average mortgage adds about
$50 a month to the bill, another EIGHT
increases (highly unlikely!) would mean
$400 a month, or $4,800 a year, assuming
you couldn’t pass the costs on (also
highly unlikely).
What if the value of the $400,000 investment
property increased by less than HALF the
current growth rate? Let’s assume
a growth of 8%.
This would see your wealth increasing
by $32,000, in one year. How does the
(unlikely) $4,800 cost increase look now?
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