Interest rates likely to remain stable

In a keynote speech delivered on July 26, Reserve Bank (RBA) governor Dr Philip Lowe warned that any further interest rate cuts to stimulate higher inflation would risk a blow out in asset prices and household debt. Dr Lowe also added that the global move by central banks to increase rates had no immediate implications for the RBA. These statements should service to quash recent discussion that the official cash rate could rise by two per cent. or more over the next 18 months to two years.

Real Estate Institute of Australia (REIA) President Malcolm Gunning also points out that the June 2017 quarter CPI figures "suggest the continuation of historically low interest rates for some time yet, which is good news for homebuyers and renters".

Mr Gunning further points out that  "consecutive interest rate rises of up to two per cent would flatline property prices, especially for new apartments in Sydney and Melbourne and we would see a lot of discounting taking place. By keeping rates on hold, the RBA is enabling the economy to transition from the construction boom.

"Speculative buying by investors has already been killed off by tightened lending restrictions and the housing market is cooling. In my opinion, we're now in a cycle where property prices will be in line with inflation, which is currently about two per cent. At present, the economy is growing stronger, we're seeing good job figures but no rising wages. The signals to be on the alert for a rise in interest rates will be falling unemployment growth and rising wages."

Says Rich Harvey, Managing Director of buyers agency Property buyer, "If the RBA were to move too quickly to raise rates it would have a detrimental effect on other parts of the economy, not just the housing market. In my onion, interest rates will definitely be on hold until the end of this year, with possible gradual rises from mid next year."

"Cheap credit fuelled the housing boom but no banks have increased their rates and APRA (Australian Prudential Regulation Authority) has ruled that they tighten their lending conditions we won't be seeing so much lending activity."

"My tip to prepare ahead for future rate rises is for home buyers and investors to use a really good mortgage broker and take advantage of the fact that non-bank lenders will become more competitive. Also be sure to have a buffer against rate rises and don't overexpose yourself."

Armen Vartazarian, Head of Finance for The Orbit Group financial advisers concurs that interest rates are not solely controlled by the RBA anymore and there's little likelihood of rates increasing across the board over the next 18 months and there will be a steadying of the property market.

"Australia has a really robust banking and finance sector and a very robust economy. Population growth will continue to drive the property market but we will see a flattening rather than a bubble bursting."

"The investment and low doc lending space is more likely to be impacted over the next two years than owner-occupier borrowing. Bread and butter, vanilla loans are gone. There's been a quadrupling of product on offer by lenders. These variations mean that both home buyers an investors need the best advice possible to restructure for the future. With banks becoming more stringent on interest-only loans from mid-2016 many investors will be unable to refinance their loan as interest-only again when their five-year term finishes in 2021. We are currently encouraging clients to refinance to a 30-year principal and interest loan now to take advantage of the more attractive rates and allow for a softer landing."

In the current complex landscape, Vartazarian encourages all property investors to assess their portfolio. "It's all about controlling the unknown, and for that you need independent advice".

 

Published in Australian Property Investor magazine 28th July 2017