Why low-interest rates are causing such a high interest in property
Updated: Oct 20, 2021
Property is a well-trodden path to riches for many Australians. Despite a few ups and downs, residential housing has delivered strong returns throughout the years and claimed its place as one of the top generational wealth builders. And experts predict that property prices will continue to rise in the foreseeable future. But even experts can't make you any financial guarantees. So, you've still got to be careful.
I believe that families should consider the value of property ownership in their overall plan for multi-generational wealth as it gives off a rich sense of financial stability and overall quality of life. But for many, owning property has become unaffordable and out of reach.
The big driver of property growth has been our record low-interest rates. On the one hand, low rates make it cheaper to borrow. And on the other hand, they reduce the interest earned on bank accounts. Have you checked out the interest in your savings account lately?
With banks offering a very low return on deposit accounts, many investors are tempted to chase higher returns on a rental property instead. On top of that, household savings are also flying high, which means there is even more money piling into the property market by both homeowners and investors alike. High demand, with a low supply, equals higher prices.
The Reserve Bank is supporting low-interest rates for Australia's economic recovery and they state that this will continue as planned until 2024 at the earliest.
With low-interest rates expected to be the norm for the next few years, and with it unlikely that there will be any changes to negative gearing or capital gains tax discounts for investors any time soon, it could look like an opportune time to buy property.
An unavoidable consequence
But these continued low-interest rates, the very same ones rescuing Australia's COVID impacted economy, seem to be adding more fuel to the fire for already high property prices. The booming property prices have become an unavoidable consequence of Reserve Bank actions. But can it be fixed, and how?
In June 2021, the Podcast by Reserve Bank of Australia – Monetary Policy during COVID-19 featured Deputy Governor Guy Debelle saying just that - and that "there are a number of tools that can be used to address the issue, but I don't think that monetary policy is one of those tools."
So, this tells me that there are special RBA tools to create economic good times - and then there are some 'other' tools to cool its heels.
Some new tools
If you're entering the property market now you’ll be looking for price growth to continue beyond the next couple of years. It would be reasonable to think that you'd at least want to recoup some of the costs to get into the property market. But there are things planned in the short-term which would have the potential to slow this desired future growth rate down leaving many who have bought at the peak not able to realise the growth aspirations that attracted them to enter this raging market in the first place.
Treasurer Josh Frydenberg is supporting Australian regulators such as APRA, in conjunction with the RBA, to crack down on high-debt home loans to reduce financial risks from record-low interest rates and surging property prices. Yes, this means it could get a lot harder for Aussies to borrow money to get into a property.
Financial regulators are devising ways to restrict a further jump in high debt-to-income ratios for new borrowers. Which in simple terms means putting stronger rules around the level of a proposed home loan in comparison to your annual income. This was a problem created by super-low home loan rates which helped home buyers to borrow much larger amounts than in previous years.
As a financial adviser, I'm thinking that the discussions around property growth start to get more interesting for families when you consider the following;
The RBA has stated that it will keep interest rates low until inflation has hit a stable level. But what if this occurs sooner rather than later and the RBA has to make the call to lift the cash rate sooner?
What will happen to the family budget if interest rates rise and the cost to meet mortgage repayments takes a big step up? Will they still be able to afford their large home loans?
What will happen to the overall property growth rate when the new tools come into play and fewer borrowers are being approved for home loans? Worse still, what if property values cooled enough and values go backwards?
What if the overall dollar value of the average home loan is reduced when the banks are forced to assess them differently under different lending rules?
It's been a good time for property, fuelled by cheap money and lot's of it, but as they say, past performance isn’t always a good predictor of future gains. A combination of rising interest rates and tighter lending rules may just be the 'tools that cool' the property market, leading to a reprieve in the current rapid growth. Maybe over the next couple of years, this will be a chance for the market to consolidate a little and open up more affordable homeownership for families that can't get in right now.
Shaun O'Keefe thinks that families are important. He's found that he can help more people, more effectively when he helps families. As a fee-based financial planner, he works with families just like yours to bring personal values and financial resources in line so that you can keep focussed on the priorities in your life.
The information contained in this article is general in nature only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision concerning a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.