Today’s 0.25 per cent interest rate rise will make it a little more difficult for some property investors – particularly those looking at a first or second purchase – to enter the market.
With standard variable mortgage rates now moving to 8.3 per cent from 8.05 per cent, the increase will particularly impact on investors who are also highly geared on their own home loans or may be carrying a lot of consumer debt.
However, for investors who are already in the market, I expect to see the supply of rental property remaining very low for longer than expected and strong rent levels being sustained for the foreseeable future. It is likely, there may be further upward pressure on rental costs for tenants as investors seek to cover their own increased costs.
The added pressure on rental accommodation will arise from a predictable hesitation on the part of first homebuyers trying to get into the property market, since record low affordability levels are unlikely to improve in the short to medium term.
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Earlier this week deteriorating affordability was highlighted in an Urban Development Institute of Australia report that noted among 70 of Australia’s most popular suburbs the affordability ratio plunged from 96 per cent to 39 per cent.
At the same time, the new housing construction market has not kept abreast of demand and we are unlikely to see any quick turnaround in this sector of the market as a means of easing rental shortages.
I believe the Reserve Bank’s move should, however, be viewed as fiscally responsible and designed to prevent a volatile, overheated economy reminiscent of the late 1980s.
Under the Hawke/Keating Government, the failure to reign in inflation in a rapidly expanding economy saw the rapid and frequent raising of interest rates, which led to recession. It was the combination of an overheated economy without the fiscal control that saw the property markets falter in the early 1990’s.
Property investors need to bear in mind that even though interest rates have reached their highest level in a decade, they are still historically low. It is possible that we could see another rate rise in the next 12 months, if inflation spirals out of the Reserve Bank’s target zone.
In this type of climate, investors Australia-wide should keep one thing in mind when looking at investment property purchases. Depending on their location, stick to property priced between $250,000 as an entry point for apartments and up to $800,000 for houses. Aim for property that is the most affordable for the vast majority of tenants and owner/occupiers the bulk of the time.
* This is an edited extract of Monique Wakelin’s weekly property column which will appear in this evening’s Eureka Report at www.eurekareport.com.au