Confidence is surging amongst real estate investors in Australia despite the narrative being played out by the mass media. The media currently reports that real estate prices are falling, and investors have pulled out of the market. This could not be further from the truth.
Property investors are undeterred about the recent interest rate rise, with current data reporting that new investment loans have doubled in the past twelve months ending March 2022.
The election has come and gone, and Labor’s promise not to tamper with negative gearing is a relief to many investors, but there’s more to the current buying surge.
In May, we saw the Reserve Bank of Australia raise interest rates for the first time in eleven years and recently raised a further 50 basis points. The official cash rate has increased to 0.85 per cent from 0.1 per cent.
I’ve been asked a lot about interest rates and how they will potentially impact property investors in recent times. The truth is a rise in interest rates has been barely felt by investors as rental yields are at record highs, strong rental demand provides security in the long term and shortages of supply – driven even more so by the rising immigration and the return of overseas students.
Here’s Why Investors Should Not Worry About Interest Rate Rises
Vacancy Rates are at Historical Lows
Vacancy rates are at record lows around Australia. The national rental vacancy rate fell to 1 per cent in March, which is half what it was last year.
This certainly places the rental market in the landlords’ favour.
As interest rates rise, a nervous investor may be pondering whether they will be able to afford the property should the home be vacant for an extended period.
Many of our clients have investment properties in Brisbane. Currently, the vacancy rate in Brisbane sits at 0.6%. This equates to a yearly vacancy of 2.5 days per annum.
All Property Rents at the Right Price
Also, it’s worth noting that all property will rent for the right price.
If the property has been on the market for a couple of weeks and there’s been limited interest then drop the rent by $5 or $10 dollars.
If you’re trying to rent it for $500 p/w, every week you hold out for your desired rent it’s actually costing you $500.
However, if you drop the rent to $490 per week, yes it will cost you $10 x 52 weeks, which is $520 for the year BUT it will save you $500 per week for each week it would have been vacant while you were waiting for your desired rent.
So if you waited 3 weeks to get your desired rent of $500 it would have cost you $1500. But if you had dropped the rent and got a tenant in at $490 it would have cost you $520 rather than $1500.
Can you Afford a Two-Day Vacancy?
Construction Boom Will do Little to Ease Rental Crisis
Our research indicates that the vacancy rates will continue to stay near-record lows as the lack of new housing supply continues to affect would-be renters.
A client recently raised the point about the construction boom and how record numbers of new homes were being built in many parts of the country; yes, that is correct.
However, it is important to note that the construction boom has been ignited by the federal government’s home builder grant, which gave owner-occupiers the chance to build a new home with the assistance of a Government-funded $25,000 grant. Most new homes currently under construction will never actually hit the open rental market.
Rental Yields are on the Rise
Rental yields are proving very attractive to property investors in 2022. Residential housing has been the safest bet throughout the pandemic, with both sale and rental prices seeing tremendous growth.
Rental prices have grown by over 20% in all major capital cities in Australia, resulting in a favourable cash flow for many investors around the country.
Our clients Darren and Joelle, who own an investment property in Greenbank in Brisbane’s south, have increased their weekly rental income by over $140 in just twelve months – resulting in a gross rental yield of almost 7%.
If your investment property was rented for $500 per week in 2021, it is likely that it could rent for over $600 per week in 2022.
Now, I don’t recommend hiking up your rent stupidly – you must be conscious of your tenant and what they can afford. However, if your tenant moves out you should definitely be increasing your rent to be at fair market value.
Understandably those not in the market will ask whether rental prices have peaked and if these rental increases will offset potential interest rates in the future?
You’ll have to read on to find out.
The Population Boom Adds Further Pressure on Vacancy Rates and Rental Prices
In one of our most popular blogs, “Queensland is on the brink of an astronomical population boom!” we discussed the current population boom currently being experienced in South East Queensland.
Data sourced by our acquisition and research team indicate that the population of Queensland could surge past six million in just five years.
This surge in population will continue to put pressure upwards on the rental market over an extended period.
Ultimately, supply and demand affect house prices in both the rental and sales markets. An influx in population adds more demand to the market, and there’s no supply available currently to keep up, nor will there be in the near or medium future.
How Much Will Your Repayments Increase?
Some of our clients may remember that interest rates reached an all-time high of 17.5 per cent in January 1990. Since then, they have averaged just below 4 per cent.
It’s been over ten years since the Reserve Bank increased rates, which means this will be the first time they’ve experienced an interest rate rise for many Australians.
Understandably this may cause some homeowners to be nervous. Many of these nerves are likely because many don’t know how much their repayments will rise.
We’ve made it easy for you in the table below to understand how much your repayments may change.
There has Never Been a Better Time to Invest
Rising interest rates were always inevitable. If you based your purchasing decision on current interest rates remaining as they are forever, then, unfortunately, you’ve been severely misguided.
Investors should look to capitalise on the current market conditions. Yes, interest rates will likely rise over the coming years, but an investor with the appropriate guidance should not let this fear get in the way of your aspiration of accumulating wealth.
We’ve guided hundreds of Australians to accumulate wealth via property in many different cycles. There are opportunities in every marketplace.
Our team are here to assist you in understanding what interest rate rises mean for you and how you can capitalise.
Reach out if you’d like to have a chat.
And if you’d like to read more about the affect interest rates and inflation, and what this means for property investors read our recent blog HERE.
