Chapter 1: What impact do rising interest rates have on the property market?
It's the Real Estate Podcast, across every state, city and town of Australia. And welcome to another episode of the Real Estate Podcast, available on iHeartRadio and also Spotify and Apple Podcasts or wherever you get your podcasts from. It is another Friday. Yes, the weekend is beckoning, June the 17th for 2022.
Coming up, we are talking with Rich Harvey as we do each and every Friday morning and discussing this morning the rising interest rates and the impact of it to you and to the property market. Also, we have this fantastic, magical two-night stay in the Hunter Valley we are giving away. You could win this with great food.
It's an incredible prize because it's got a great list of activities for you to do that we have put together with the Hunter Valley Wine and Tourism Association. And tomorrow we'll talk with Katie Lee from the Hunter Valley with more details. This is going to be starting on Monday. It's the main centre forecast with propertybuyer.com.au.
Okay, let's have a look at your weather around Australia for this Friday morning. First, we look at Sydney, a possible late shower. So there's a good chance that it may remain dry for much of today, expecting a high of 19 degrees. Melbourne expecting showers easing and 15. Brisbane, a sunny day with 22 as your forecast high. And in Perth, that's probably the hottest spot to be in the country.
Expecting some showers turning up at some stage today and your high of 23 degrees. We feature market updates, interviews and trends. It's your real estate podcast for breakfast.
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Chapter 2: How have recent interest rate changes affected borrowers?
And if you're celebrating a birthday today, you are celebrating with Stephanie Rice. Remember her? The Australian swimmer who won three Olympic gold medals back in 2008. She was born on this day in Brisbane in 1988. And having a look on this day in the history books, Captain James Cook first sights Australia.
And he writes in the logbook, What we have seen of this land appears rather low and not very hilly, and the face of the country is green and woody, but the seashore is all white sand. Enjoy your morning coffee. Wake up every morning to the Real Estate Podcast. And rising interest rates are a new phenomenon, as we know, for many, many borrowers.
We've had a long decade of interest rate declines associated with several property booms. But it comes as no surprise that in June for 2022, you and I, are now at a turning point with interest rates rising from those historic lows. But digging deeper, how will the rising interest rates impact the property market?
Well, let's dive into this whole aspect with Rich Harvey, CEO and founder of propertybuyer.com.au. Good morning, Rich. Welcome back. And boy, a big subject to cover today.
Good morning, Craig. Yes, it certainly is. I mean, we've had this week the Federal Reserve Bank in the US jack rates up by a record 0.75% in one month.
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Chapter 3: What historical context is important for understanding current interest rates?
Inflation is pretty out of control there, but it's a very topical subject right here throughout Australia.
Yes, certainly. And it was back in December of 2021, the RBA was predicting to lift its cash rate by the first quarter of 2023. That completely went out the window, Rich.
It certainly did. I mean, the RBA had said there's going to be no interest rate rises until at least 2024. And then they changed their tune and they've lifted rates 0.25 in May and 0.5% this month in June. And that takes the cash rate now to 0.85%. So it's a lot sooner than they originally indicated. And it's simply because there's been a spike in inflation. There's huge supply chain issues.
which has become deeply embedded right across the world, and it's jacked up the prices of a lot of goods and services. It's a lot of, obviously, related to COVID-related shortages that we're seeing in the supermarket. But of course, the Russia-Ukraine war is having a major impact on petrol and oil prices. And that's really inspired inflation to get above almost 5% in Australia.
But on the positive side, rising interest rates, Craig, is actually a good thing. It shows that the economy is firing again. We've come off this record low 0.1% cash rate, almost a zero cash rate. And the RBA has said they want inflation back in that 2% to 3% range, and they've got to rein it back into control.
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Chapter 4: What are the misconceptions about media coverage on rising interest rates?
Yeah, I think the big problem that the RBA have got and they recognise is that the inflation is going to get a whole lot worse than before it gets better. But as you say, everything is firing. So those are the pluses.
That's right. Absolutely. It's great to see the economy really thriving, unemployment's low, and everything's moving ahead again.
And have you got any thoughts on economists? Because they're a great talking point, aren't they?
And they keep changing their forecasts. Absolutely. Well, I'm an economist by training too, Craig. So whenever you point the finger, remember you've got four fingers pointing back. But the RBA economists, they're not so good at forecasting things. And same with bank economists. They're not terribly good
forecasting, because remember when COVID first hit, they were saying property prices could drop 30%. Well, in fact, prices rose around 38% throughout Sydney and significantly more in other areas of Australia.
So they tend to have a tunnel vision and they often think, a lot of them are just a one-track mind saying that interest rates are the sole factor determining whether property prices rise or fall. Now, that's an incorrect assumption. And that's why property economists get it wrong, because there's many, many assumptions to make and many, many moving parts.
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Chapter 5: How should homeowners prepare for increasing interest rates?
If you look back over history, you'll see that there's been times where we've had very high interest rates and very fast-moving property prices upward as well. It's not that the current boom was just caused by low interest rates. That helped to fuel it, but it wasn't the only factor.
There's a number of factors that cause economists to change their mind because the economy and the data keeps changing.
Yeah. And Amy, I think you've got a question.
Yes. Good morning, Rich. What are your comments about the media's reaction to the rising interest rates?
Yeah, great question, Amy. We've had a massive overreaction by the media to the consequences of these initial two rate rises. And the media always exaggerate the impact of these rises and create this sort of atmosphere of basically doom and gloom. But the reality is the RBA needs to get back to what they call the neutral interest rate. We've had two interest rate rises.
We've still got very, very low interest rates. We're not at that very high factor straight away. And we're not going to go to that neutral rate, I think, which is around 2% to 2.5% immediately. In the borrower's favour is the major lenders have said that the borrowers are well ahead of their repayments. The borrowers have built up massive savings during the COVID period.
know anz westpac bankwest they reckon that their customers are around 90 ahead on their repayments and the other thing that happened when interest rates were low a lot of borrowers could have actually stopped repaying their loans there was a loan period of grace to not repay but most people didn't do that they kept on making repayments at the same level as when interest rates were higher so there's significant buffers in the system and even when you go to borrow money today apra have asked
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Chapter 6: Is now a good time to buy property despite rising interest rates?
the lenders to assess the borrower's ability to repay loans on a much higher rate, at least 3% above the current rate. So instead of assessing someone today at 2.5%, they'll be assessed at a 5.5% rate, and they'll always be that 3% buffer rate, no matter where interest rates go to.
So you're seeing a lot of media headlines saying that there's going to be mortgage stress, it's going to be rampant and all this other clickbait stuff, which is rubbish. A lot of these propositions are put forward by attention-seeking economists or journalists and suggest that rising rates means a dramatic fall in prices. Look, there's no doubt that it's having a negative impact on prices.
And in fact, prices have come back, I think, around 8% to 10% in a lot of areas. But if we look back in history and we look back at 2002 to 2008, during that period of time, there were 22 increases in the standard variable rate for mortgages. So back in that time, Craig, people were paying 8% to 9% on their mortgages.
But at the same time, property prices more than doubled across most markets in Australia. So that's a really interesting takeaway that I think people need to know, that we have had times where you have rising interest rates and potentially some falling. And then it's going to basically see potentially a very rapid repeat of history and property prices will continue their boom again.
Yeah, and I'm old enough to remember paying 18%. And we've talked a lot about how homeowners and investors can prepare themselves for rising interest rates that you're talking about. You've been around long enough. You're not a millennial that has never seen this happen before. You've seen it happen before. So what can you suggest to people that are finding this new reality?
Well, the best thing to do, Craig, is to do the maths. It's simply, you know, work out what's going to be the actual impact on your weekly budget of each interest rate rise.
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Chapter 7: What strategies can investors use during periods of rising rates?
So let me give you an example. Let's say you've got a mortgage of $750,000 outstanding and you're currently paying 2.5% on that mortgage. Now, if you get an extra 0.25% increase, your repayments per month will increase by $99. Now, if the interest rate goes up by half a percent, you'll be paying, you know, $198, almost $200. So let's round it up.
For every quarter percent rise on a 750 loan, you'll be paying $100. Double that for a 0.5%, you'll be paying $200. So then look at that in the context of your budget. Is that a lot of money? You know, that extra $100, $25 a week, you know, yeah, that's a couple of coffees, that's maybe a lunch out. But it also is going to get multiplied. Is not just going to be 1.25% rise.
We know that the cash rate is currently at 0.85%. It's probably going to go to 2% or 2.5%. So you've got to factor in what does that mean for you? You might need to look at what are you currently paying on your mortgage rates? Is it time to look at extracting some equity and potentially look at investing again? Is it better to look around and change lenders?
I think the other thing to look at is that the Reserve Bank, even though they've increased interest rates, when that's happening, we're actually seeing fixed rates rising quite dramatically.
Chapter 8: What final advice does the guest offer regarding property investment?
But the variable rates have actually been cut and very, very competitive amongst the lenders. So it's actually a really good time to think about refinancing and talking to a broker about that.
Yeah, absolutely. And people right now, of course, they're asking themselves with the rising interest rates, is this the best time to buy? Well, you are out there dealing with people every day. What do you say to that?
Well, the thing is, if you wait too long to apply for a loan when interest rates have had their full, you know, rising cycle, you know, so currently you should be able to get a variable rate around 2.5, a discounted variable rate around about 2.5, 2.75%. Now, I think the mortgage rates, not the cash rate, but the mortgage rates will probably end up around 4.5%, something like that.
So if you wait until that happens, you could actually be priced out of the market in terms of your borrowing capacity. So some modelling I've seen done by some great brokers suggests that for every 1% rise in interest rates, it's going to reduce your borrowing capacity by up to 10%. And that could just put your property dreams even further out of reach.
So I think the current run of interest rates will level out, I reckon, at some point in the next 12 months. And then there'll be a turn in consumer sentiment again. At the moment, there's negative consumer sentiment. You're seeing buyers just sitting on their hands, doing nothing, vendors saying, I'm not selling.
But the trick to being a smart investor, Craig, or a smart buyer is to get ahead of the pack. and run at a different speed to the herd. It can be really hard to be what I call a counter-cyclical buyer, but the long-term rewards are really significant. It's a bit like that Warren Buffett approach, be fearful when others are greedy and greedy when others are fearful.
But if it gives your listeners any confidence, Craig, I can let you in on a little secret and let you know that I've actually just purchased two properties in the last four weeks. So for me, rising interest rates presents an amazing opportunity. It doesn't deter me from achieving my long-term goals of building up a portfolio.
What I do is I look at the numbers and I build in the cost of the higher debt at a higher figure compared to what I'm paying now, build in that buffer and make sure that what I'm buying today represents good value both now and in the future. And I simply do the calculations and work out I can afford the repayments and I'm loving it because I'm able to negotiate great prices at the moment.
Rich Harvey, you are ahead of the pack. So great information coming through as always on our Friday morning. Get out there and continue doing what you do so well. Look forward to catching you back next Friday.
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