High interest rates benefit investors

What will happen if rates go up? In today’s low-interest-rate environment one of the common questions property investors ask is, “What happens if we buy now and interest rates skyrocket, like back in the 1980’s?”

An understandable concern and today’s historically low interest rates can’t be sustained forever because at some point the economy will begin recovering, inflation will grow and rates will rise!

That’s part and parcel of the economy’s cyclical nature.

When rates do rise it’s doubtful they’ll hit the dizzying heights of the late 1980s. The major lenders certainly don’t think so; they’re setting their 10year fixed rates about 7per cent.

With vast resources and access to the world’s top economic minds, it’s highly unlikely that major lenders will make the wrong call about the future direction of interest rates.

But for argument’s sake that they do and rates climb back to the heady levels of 20 years ago.

If interest rates go up that far it’s a sign that business and consumer confidence is high. When rates go up so does inflation. And when inflation rises, so do property values. Yes, your holding costs will be higher because of higher interest rates but as an investor you will benefit on three fronts.

High rental returns

First-home buyers won’t be active because property is less affordable in a high-interest-rate environment. This will keep them in the rental market, put pressure on the available rental accommodation and drive up asking rents. The higher the interest rates, the higher the investment yield.

Negative gearing benefits

If your expenditure on the property exceeds your rental income, you’ll be able to soften the impact and increase your cash flow by claiming the difference as a tax deduction.

Substantial sale proceeds

If you can’t afford to hold the property you can sell it. While this isn’t an ideal scenario, your property will have grown substantially in value during the time of high inflation so you’ll be better off than when you purchased it and that is the aim of investing!

First homebuyers improve rental vacancy

Melbourne’s outer suburb vacancy rates have improved from 0.7 per cent to 1.8 per cent in the past six months, according to the Real Estate Institute of Victoria’s April vacancy rates.

The vacancy rate across Melbourne is reasonably steady having been between one and 1.4 per cent for 12 months.  However it‘s significant that there’s a recorded improvement in the outer suburbs.

The improvement could be due to the number of first homebuyers that are moving from their rented accommodation into their own home with the assistance of the grants, bonus and boosts.

The March quarter median prices showed that most of the activity in the marketplace has been in the outer suburbs; for instance Craigieburn, Melton South, Hillside, Epping, Caroline Springs, Werribee and Meadow Heights – all outer suburbs of Melbourne popular with first homebuyers.

It‘s great news for renters if a by-product of the grants, bonus and boosts is an improvement in the availability of rental accommodation, however monitoring of the situation over the next few months to will tell of continual improvement..

We would consider that the rental market would be in balance once we reach a Melbourne-wide vacancy rate of three per cent.

In the last month the figures from our REIV members have shown a very minor change in the inner suburbs where the vacancy rate moved from 1.5 to 1.3 per cent and in the middle suburbs where it moved from 1.4 to 1.3 per cent.