Hi,
By now, you’re probably aware that the Reserve Bank of Australia (RBA) has today announced that it’s chosen to increase its cash target rate by .025% (a quarter of a percent).
Over the next few hours and days, you’ll hear press releases from major lenders saying that they will be increasing their variable home loan rates. Furthermore, but with less fanfare, you should expect credit card companies, personal loans, etc. will all increase their interest rates too.
As investors, our job is not to respond emotionally to this change in investing climate. Instead, we need to reassess our market position, and re-evaluate the effectiveness of our chosen money-making strategies.
For example, I am looking at a large parcel of land that could be subdivided and turned into an estate. However, as a response to the interest rate rise, it would now be more prudent to stick to smaller scale projects that are both less cash intensive and also less risky.
No, the rate rise has not made the project uncommercial. However, change leads to change, and in this case it is reasonable to expect that it will now be that little bit harder to sell property and realise gains.
Also, with finite cash for deposits, it would be better to retain the cash for future deals where the vendor was more ‘negotiable’ than to allocate the money now.
So, in summary, here’s what the rate rise means/confirms:
* Although still at historically low levels, we are now in a trend of increasing interest rates (the last six movements, albeit over 48 months, have been up).
* Despite being at low levels, Australian households carry a lot more debt than in the early 1990’s. Interest rates do not need to rise as high as they did in the last recession to have the same effect. In combination with high oil prices, the hip pocket hurt will be real.
* It’s reasonable to expect that it will be harder to sell real estate, particularly property that is priced above the median for the area. This is because most households have to borrow 80%+ of the purchase price, and with higher interest rates, households will now have to borrow less and remain in affordability limits.
For example, let’s say that a buyer has $80,000 for a deposit and wants to borrow 80% for a home. The repayment based on a $400,000 loan (on a 6% loan over 25 years with weekly payments) was $594.25. It’s now (based on a 6.25%) $608.42. Alternatively, to keep the repayment at $594.25 (at 6.25%), the loan amount would have to be reduced to $390,690.
All in all then, the ability to borrow less will put pressure on property prices to fall. In the example above, a .025% increase in interest rates has led to a $9,310 drop in affordability.
* There will be more opportunity for cashed up investors, as the number of properties put up for sale is unlikely to fall, however the number of legitimate buyers will diminish. When supply exceeds demand, price falls and/or buyers are more willing to negotiate.
* Banks are going to be more edgy about lending. Already the word around town is that mortgage brokers are ‘softly concerned’ about the number of loan defaults happening. I would imagine that it is going to be increasingly difficult for the financially stretched to secure >80% loans.
Well, that’s about it from me. I am typing this out on the plane coming back from Mackay to Melbourne. I hope that you have found it useful. More than anything, I would urge you not to be complacent about your investing. No doubt some will see this raise in interest rates as a disaster. Others see change as opportunity in disguise.
Until next time… remember that success comes from doing things differently.
Regards,
– Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi Steve,
Jeff here, from the Wild West.
I believe Easter States will show more of an impact than here in WA, if only because the prices have already gone down (even before the interest rate raise).
Here in WA, prices have been up, up and away for a while now… and it continues on that trend. I think this is because there is an actual shortage of rental houses here, due to the massive migration of people looking for work as a result of the resources boom.
I’ve had a theory, though, as to what is to come Australia-wide taking into account the following factors:
1. Interest rate raise;
2. Petrol prices;
3. Lack of job security with the new IR laws; and
4. InflationMy theory is that, eventually, families will find it difficult to service their mortgages… and they will either start defaulting, or will sell their properties to release themselves from their overcommittments.
That may be the best time to buy…
… I hope I’m right.
Jeff
There will be more opportunity for cashed up investors, as the number of properties put up for sale is unlikely to fall, however the number of legitimate buyers will diminish. When supply exceeds demand, price falls and/or buyers are more willing to negotiate.can’t wait
with a long term view of real estate investing we see flatter markets as opportunities to acquire quality properties.
but avoid the first rounds of panic selling because typically this is when investors “shoot the dogs” in their portfolio’s. Problem low growth potential properties get sold first.
we always maintain 75% of debt on a fixed rate staggered to come of fixed at different periods.
as steve says – avoid emotion
Hi Jeff,
We have family in mining and just be careful about banking all your hopes on a resource fulled boom. especially one that comes at the tale of the property cycle (read property clock keiran trass). coal and gold mines can close overnight. now matter how well each establishment runs their mine they are a price taker in the world market and costs of production are largely fixed. I grew up in the nsw hunter valley and saw mines close off the back of low world coal prices – it happens overnight in a blink of an eye the whole demograhic and mood of a place changes. I used to work in the local pub which also suffered as did most business – not just mining related business.
cheers
I Buy Property http://www.cashflowproperties.co.nz
Thats really taking a contrarian view Steve,
As winter approaches you should be flying to Mackay from Melbourne, not the other way around.
And if you don’t want that parcel of land, how about passing it on to a buddy ?DLPP,
I would think coal is a very different proposition from iron ore or oil/gas for example.Price taker or not, when the expansion projects are in an upswing, and more 25 yr contracts are being signed starting from 2010, I don’t think the prospect of mines and oil/gas fields closing is imminent.
Therte seems to be this pervasive sense of caution, doom and gloom that eminates from the eastern seaboard.
We have been buying property ( no equities )non stop over the last few years, and not just in WA, this year is going to be our busiest, and most profitable.
I’m not sure what everyone is waiting for ??
( Give me a sign…give me a sign …)kp
DLPP,
I would think coal is a very different proposition from iron ore or oil/gas for example.yes – you a right there would be a big difference.
and you will find that people are unlikely to accept that things are better in say wa right now than sydney,nz,us and many part of the world. I suppose all i am trying to say is that all growth is cyclical and that there may be timing issues with two significant market peaking at the same time eg property and resources. That is very simplistic but something to consider at least.
On the up side won’t matter where you are or what market you are in – – savvy investors will continue to make money.
I Buy Property http://www.cashflowproperties.co.nz
Thanks for your advice Steve,
Jeff, DLPP and Kp thanks too.
My education is all the better from reading forums where such valuable information is shared freely.
From an observation point, I have noticed that the retailers “Sales” seem to be a continual thing now. Moving from one excuse to the other to have a sale and maybe snag a buyer. They seem to be doing it tough. Now with the rate rises, and of course ever increasing petrol prices, the strain is going to be too much for some retailers. The ripple effect is going to be very interesting.
[worried]
Interesting times here in WA.
We are at the peaks of record highs in the property market, with a very very thin volumes of supply. There are massive delays in the construction of new housing stocks, caused by a greater demand for labour than can be met.
One of the unseen effects of these housing construction delays is an unusually high number of “transient renters” who are forced to rent for longer periods than normal as a result of their new houses taking longer to build than they plan (18- 24 months is normal at present).
When construction times get back to a more normal level (6 – 12 months) then there should be an excess of rental housing stocks available, which will have the normal supply / demand consequences…all other things being equal.
Another and more serious impact of this shortfall is the delays it is causing in the investment decisions made by the mining companies for major infrastrucutre projects. These include the multi billion dollar expansions propoed by Alcoa – Wagerup, Chevron – Gorgon, Worley and of course our incessantly spending. These shortfalls are exacerbated by our own state government rolling out some of the largest infrastructure projects in our state’s history…all at once – the Mandurah rail, Mandurah bypass/freeway, Tonkin highway extensions and champion lakes redevelopment.
How this will all play out is difficult to see, but I see two distinct possibilities:
1. We kill the goose that lays the golden egg and infrastructure projects and the real wealth they can bring to this state are delayed indefinitely (read cancelled) and we are left with little more than a housing bubble which will burst.
2. The delays in the aforementioned projects is temporary and we manage to extend the period of growth we are currently experiencing over decades rather than years causing long term value growth in the real estate market at a more sustainable level.
Either way, an interest rate hike is a positive thing for WA, in that it should calm some of the “irrational exuberance” found in our local real estate market, although we will probably need another 0.5% for the speculative buyers to really get the message.
In doing this, we run the risk of pushing up the $A, causing our production costs (in $US terms) to increase, and again killing the goose that lays the golden egg.
It may all seem a bit complex (well it does to me anyway), but we operate in a global interconnected marketplace.
As to what this means to astute Western Australian investors…now is a great time to be looking for bargains on the Eastern seaboard and hedging your positions in WA.
Do good, and do well!
Man, that was well thought out and well written Anthony.
Understand what you are suggesting DLPP.
All I would say is that the assumption is that both markets are peaking. They peak will only be determined once it is reached, and we may not be at that point yet. There is talk of further price rises in the current negotiations with Chinese and Japanes buyers for ore prices,and the general concensus is that teh property market has further to go. At least 10% and maybe 20% for this year.SO from a big picture point of view, and taking heed of the cyclic nature of these things, sure enough, it will have an end, but when it the question.
I also agree retail is both doing it tough and going to do it tough Agave.
The sales are all 50% off ( on selected items !!) and on all the time. Surely the average puppy dog is now immune to this sort of advertising ??
kp
Originally posted by Anthony.Congdon8421:Interesting times here in WA.
Either way, an interest rate hike is a positive thing for WA, in that it should calm some of the “irrational exuberance” found in our local real estate market, although we will probably need another 0.5% for the speculative buyers to really get the message.
As to what this means to astute Western Australian investors…now is a great time to be looking for bargains on the Eastern seaboard and hedging your positions in WA.
I couldn’t agree more this was very well written Anthony. It’s nice to know you own a Property in W.A but it is very frustrating trying to buy one in these conditions. This morning on the radio a property market analyser was giving his thoughts on this topic. He believes that the interest rate rise will help bring W.A back into prospective with the national property market. He believes that we have hit the peak and the market will now go sideways and some areas which were over priced due to the hype of the last 12 months may even see a small decrease in value. He suggested that he still wouldn’t be buying in W.A until 12 months down the track when there will be a lot more properties coming onto the market giving the buyer back some bargaining power. I was speaking with a real estate agent the other day and he led me to believe that he is already starting to notice that the +400 000 dollar price range is getting difficult to sell. He did however say that 200 000 to 300 000 is still being snapped up before an advert is put in the paper.
Have to agree with DLPP on mines shutting down overnight yes the resource price is great with China needing our steel etc but at the end of the day if a company is not managed well these prices wont help. I have also heard that shares will not fair as well this year as they did last year the resource sector in particular will take a dive.
Well I guess it is going to be an interesting year for investors And as Robert Kiyosaki says a good investor will find a way to make money in a rising market as well as a falling one.
Dear Steve McKnight, firstly thankyou for your newsletters i find them very informative. Second of all interest rates – i have just fixed 2 of my loans for 5 years at 6.79% ok probably not the best rate in town but these are both I/O loans 1st loan which i have just changed from P/I to I/O the bank waived all switching fee’s and gave me discounts on an this loan plus another one i have with the same bank also dropped the monthly fee’s which i was paying total $20 / month on 2 loans. The second loan which is a new loan with another bank which i have never dealt with before not even being a customer of theirs waived establishment fee’s monthly fee’s and gave me a discounted rate as well i have 3 other loans i need to tune up a little in the way of fee’s and interest rates. If anything i think the banks are willing too negotiate to get your business
WILL THE REAL AUTHOR PLEASE STAND UP?
I received Steve’s email (Investor Alert) regarding this topic. I also received one from ‘Access-One’ (I subscribe to many property newsletters, some good, some otherwise…).
Both emails are near enough to identical – however they’re ‘written’ by different people.[confused2].
So Steve, what’s the goss? Are you involved with A1, or have you or Access-One used some ‘artistic license’? Didn’t you say that you were writing the article on the plane???? Or, do you simply share content? Fair enough, but the original author (whether yourself or otherwise) should be specified.
The articles appear below:
Access-One EMAIL
By now, you’re probably aware that the Reserve Bank of Australia (RBA) has yesterday announced that it’s chosen to increase its cash target rate by .025% (a quarter of a percent).
Over the next few days, you’ll hear press releases from major lenders saying that they will be increasing their variable home loan rates. In fact we are having problems speaking to our relationship managers from our lending panel because there all in meetings discussing their positions.
As investors and homeowners, our job is not to respond emotionally to this change in climate. Instead, we need to reassess our position, and re-evaluate the effectiveness of our chosen money strategies. e.g. fixing a portion or finding better rates.
So, in summary, here’s what the rate rise means/confirms:
* Although still at historically low levels, we are now in a trend of increasing interest rates (the last six movements, albeit over 48 months, have been up).
* Despite being at low levels, Australian households carry a lot more debt than in the early 1990’s. Interest rates do not need to rise as high as they did in the last recession to have the same effect. In combination with high oil prices, the hip pocket hurt will be real.
* It’s reasonable to expect that it will be harder to sell real estate, particularly property that is priced above the median for the area. This is because most households have to borrow 80%+ of the purchase price, and with higher interest rates, households will now have to borrow less and remain in affordability limits.
* There will be more opportunity for cashed up investors, as the number of properties put up for sale is unlikely to fall, however the number of legitimate buyers may diminish. When supply exceeds demand, price falls and/or buyers are more willing to negotiate.
Yours Sincerely,
Lee Naismith
Loans ManagerSTEVE’S EMAIL: (Investor Alert)
By now, you’re probably aware that the Reserve Bank of Australia (RBA) has today announced that it’s chosen to increase its cash target rate by .025% (a quarter of a percent).
Over the next few hours and days, you’ll hear press releases from major lenders saying that they will be increasing their variable home loan rates. Furthermore, but with less fanfare, you should expect credit card companies, personal loans, etc. will all increase their interest rates too.
As investors, our job is not to respond emotionally to this change in investing climate. Instead, we need to reassess our market position, and re-evaluate the effectiveness of our chosen money-making strategies.
For example, I am looking at a large parcel of land that could be subdivided and turned into an estate. However, as a response to the interest rate rise, it would now be more prudent to stick to smaller scale projects that are both less cash intensive and also less risky.
No, the rate rise has not made the project uncommercial. However, change leads to change, and in this case it is reasonable to expect that it will now be that little bit harder to sell property and realise gains.
Also, with finite cash for deposits, it would be better to retain the cash for future deals where the vendor was more ‘negotiable’ than to allocate the money now.
So, in summary, here’s what the rate rise means/confirms:
* Although still at historically low levels, we are now in a trend of increasing interest rates (the last six movements, albeit over 48 months, have been up).
* Despite being at low levels, Australian households carry a lot more debt than in the early 1990’s. Interest rates do not need to rise as high as they did in the last recession to have the same effect. In combination with high oil prices, the hip pocket hurt will be real.
* It’s reasonable to expect that it will be harder to sell real estate, particularly property that is priced above the median for the area. This is because most households have to borrow 80%+ of the purchase price, and with higher interest rates, households will now have to borrow less and remain in affordability limits.
For example, let’s say that a buyer has $80,000 for a deposit and wants to borrow 80% for a home. The repayment based on a $400,000 loan (on a 6% loan over 25 years with weekly payments) was $594.25. It’s now (based on a 6.25%) $608.42. Alternatively, to keep the repayment at $594.25 (at 6.25%), the loan amount would have to be reduced to $390,690.
All in all then, the ability to borrow less will put pressure on property prices to fall. In the example above, a .025% increase in interest rates has led to a $9,310 drop in affordability.
* There will be more opportunity for cashed up investors, as the number of properties put up for sale is unlikely to fall, however the number of legitimate buyers will diminish. When supply exceeds demand, price falls and/or buyers are more willing to negotiate.
* Banks are going to be more edgy about lending. Already the word around town is that mortgage brokers are ‘softly concerned’ about the number of loan defaults happening. I would imagine that it is going to be increasingly difficult for the financially stretched to secure >80% loans.
If you have a minute or two spare, jump online and either post your opinion or else take a look at what other people have to say. The link is: <https://www.propertyinvesting.com/forum/topic/23570.html>.
Well, that’s about it from me. I am typing this out on the plane coming back from Mackay to Melbourne. I hope that you have found it useful. More than anything, I would urge you not to be complacent about your investing. No doubt some will see this raise in interest rates as a disaster. Others see change as opportunity in disguise.
Until next time… remember that success comes from doing things differently.
Regards,
– Steve McKnight
Software for people, not computers.
No one has noticed the GLARING mistake????
.025% is NOT one quarter of a percent.
It should be .25% (or 0.25%).
Just to add to the intrigue of this message. Who really wrote it??? Surely Steve wouldn’t make such an obvious error?
I am having a rest from Property investing as we are saving for an overseas trip and that is a difficult ask. ie. Saving $20k plus in a year. I am diversified in Shares and a vending maching business as well, and hope .25 percent increase in mortgage rates won’t stop people living. The share market dropped today. Was that in response to the increase? I think we need to switch markets depending on the interest rate climate, but I am not sure how this all works. Do you have readers that can offer suggestions.?
Wow,
That’s amazing! A mini-me and I didn’t even know it.
I can assure you that I wrote the piece, and it was done on the flight from Bne to Mel!… it’s even on my laptop!
I’ll make some phone calls tomorrow and see what the deal is with lifting my content.
I did write some material that was being syndicated as part of a mortgage franchise… I thought it had come to an end though.
They should have at least recognised the source though.
Thanks for the heads up.
Finally, in resepct to the 0.025% vs. .25%… perhaps you are correct. The point to note is that the increase was a quarter of one percent, or 25 basis points.
Regards,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Would be interesting to see what price bracket and/or area the rise of interest rate has the greater impact on. For other surveys evaluations are based on age, as above how about price, area.
[cap]With the recent rate hike by RBA this will place a downward pressure on property prices around Australia, Those with property investments in WA would be wise to sell at an all time high and buy on the East Coast at bargain basement prices.
Thanks Paul.[cap]Originally posted by fischer:With the recent rate hike by RBA this will place a downward pressure on property prices around Australia, Those with property investments in WA would be wise to sell at an all time high and buy on the East Coast at bargain basement prices.
Thanks Paul.[cap]Hi fischer
Yeah the thought crossed my mind but on my salary I don’t really like the idea of giving the government 50% of my profit in capital gains tax.[grrr]
Hi Roodog
Your words “I don’t really like the idea of giving the government 50% of my profit in capital gains tax” has reminded me of Steve and Dave’s advice about being willing to ‘cash out your profit ‘ from time to time to give yourself a chance to grow your portfolio.
They acknowledge that CGT will have to be paid but don’t forget, (subject to your legal structure) you may be able to take advantage of the 50% discount on CGT which means that if you make a $100K profit only $50K goes into your tax return and if your marginal tax rate is 30% (+MCL) you will pay approx $15K in tax and pocket $85K of your profit.
If you see good buying opportunities in the east you will then have a $85K stake to pick up one or more new IP’s.
Good luck!
Hi and thankyou to all who post on this forum.
I am only new to property investing, but have been following for a while (while I have been renovating my first property!!).
With regards to the recent interest rate “hike”, as a potential property investor, I am looking at this as a positive……..also I don’t see 0.25% as a hike.
I must admit I had a small chuckle to myself when one of the current affairs shows did a story on the interest rate increase. One couple said that the wife would have to go and get a job to pay for the increase……..incidently they had a $200,000 mortgage, which equated to a $500/year increase. Another said he had to sell his house. If people live beyond their means, what do they expect…….
Anyway, I am looking at it from the following angle:
1. I plan on building my portfolio to at least 15+ properties in the next few years, depending on finances and market forces.
2. I do not intend to sell these in the next 15 years, as selling properties will not build my portfolio (unless of course there are ridiculous capital gains to be made!!)
3. If i am going to buy something I want to be able to get it at the lowest price possible. More pressure on demand (ie petrol prices, interest rates, etc) helps me with this.
4. Whilst the above will put short term pressure on demand, the population of Australia is increasing, and as a result long term demand will continue to increase.
4. Prices for property in 10-20 years will be much higher than now based on long term demand increasing.Surely this recent i/r increase combined with petrol prices can only be an opportunity.
With regards to the resources boom, my partner travels frequently to China for business. One city that had a population of 12m 4 years ago now has over 20m………and this is only one of many cities (that no-one outside China has even heard of). She said that in the past 12 months, the city has transformed itself and everyone there is employed/positive……….I find it hard to comprehend that resources will crash, although I agree with sentiment that it will cool down.
Now that WA has reached levels comparable to Eastern states, and the fact that I don’t think resources will continue to increase, I will be concentrating my efforts on Bris / Syd / Melb…..but being selective with any purchases.
Am I being naive??
New to Property Investing, but have been following for a while
Hi KJK51
You make a valid point, If you were stuck in a corner and had run out of funds this would be a fair sacrifice to make to free up some cash to grow. In my opinion 15k stamp duty on buying the property then 15k on selling the property +land tax along the way means 30k+ goes to someone who I have never even met before. If possible refinancing would always be my first move for expanding a portfolio.
Cheers
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