SUE WILLIAMS MAY 18, 2022
Cashed-up property investors are set to be the biggest winners from the first in what’s likely to be a series of hikes in the Reserve Bank of Australia’s official cash rate.
The rise from the historic low of 0.1 per cent to 0.35 per cent, together with the forecast of more to come, sparked immediate fear and loathing from those whose finances were already strained by record-high home prices.
“I think we will now see a reduction in buyer demand in the market as a result of some of the scaremongering that’s gone on about this rise,” says Nicola McDougall, the chair of the Property Investment Professionals of Australia.
“As a result, the more experienced investors and more savvy home buyers will welcome less competition in the market.
“At the same time, they tend to have the discretionary income and cash flows because they’re high-income earners, so they’re the least likely to be affected by these minor increases in the interest rate.
“They will probably have a more sophisticated understanding of monetary policy and financial markets too, and will welcome a return to more sustainable conditions.”
While the RBA tends to cut rates very quickly when the economy slumps, such as after the GFC and during the COVID pandemic, it tends to lift rates extremely slowly, she points out. The last time it increased the cash rate because of inflationary concerns was during the two years from March 2006 to March 2008, when the rate rose only two percentage points over the whole period.
Australian Bureau of Statistics figures show this recent 0.25 per cent rate rise will increase interest rate charges on an average mortgage of $600,000 by an additional $1500 a year.
Borrowers have enjoyed rate cuts of 1.9 per cent over the last six years, says Geoffrey Dinh, chief executive of fintech Futurerent, so they shouldn’t be concerned about such a minor lift, particularly as they’ve already been assessed at much higher interest rates.
“Prestige property investors are likely to have most of their portfolios in Sydney and Melbourne anyway, so have benefitted from phenomenal levels of capital growth,” says Dinh, whose company gives property investors up to $100,000 of rent in advance.
“Against those, this interest rate is not significant.
“Most have bought in the cycle and have had a dream run with price growth and rental growth, and they’d typically have a lot of contingencies built in.
“They’ll have good incomes and are happy to run negatively geared property and have no problem covering a cash flow shortfall.”
But it will squeeze everyone’s hip pocket, believes Loan Market director and mortgage broker Alex Lambros.
And if investors are buying more expensive homes, it will hit them harder.
“A 0.25 per cent interest rate rise on a $10 million property will be a significant jump,” he says.
“The wealthier might have different buffers in place – more cash or more assets they can sell to raise cash – but they’ll feel it just the same.