When it comes to the finance market, almost everyone has an opinion on what may happen over the coming 12 months with regards to interest rates. So who do you believe? How will interest rate increases or decreases affect your business?
If you were to listen to the banks, they will tell you that their costs of funds are increasing which is putting pressure on them to raise their own interest rates. On the other side of the coin, the Government has its own take on what needs to happen, with influences such as negative gearing, unemployment, inflation, high prices of metropolitan houses and the Australian dollar.
Government economists really go around in circles, pulling different levers to activate different strategies in order to keep the economy on an even keel. Additionally, the reserve bank has its own part in regulating the interest rates with their finger on the interest ‘Cash rate’ pulse.
With all the experts running around in circles, how are real estate professionals and consumers going to make the correct decisions when it comes to their property business and planning for the immediate future? If the interest rates start an upward trend, consumers may refrain from purchasing a property. Who has a fabled crystal ball?
Almost everyone we speak to asks our opinion on what is going to happen with interest rates this year. Given the information at hand right now, we believe the interest rates will stay as they are, or even decrease slightly in the coming six to 12 months. As new events emerge, things can change; our opinion is based on what is happening today and has been over the last 12 months.
On occasion, we are also asked, ‘What will happen if the interest rates rise to over 15 per cent, like they did in the 80s?’ Well, in the 80s the average house price was around $40,000, meaning a mortgage payment at a 15 per cent interest rate was just achievable by most.
Today, house prices are generally between $320,000 and $800,000. An interest rate hike to 15 per cent at these levels is not so achievable; the average Australian could not afford to pay an interest rate of 15 per cent on a typical mortgage today. Such an interest rate increase would cause a virtual collapse of our economy. Houses would be handed back to the bank and rents would skyrocket. Economists and the Government understand this well and all efforts are made to steer away from that type of event.
Today’s environment in domestic real estate is fairly good for real estate agents; with interest rates at all-time lows, it’s time to ‘make hay while to the sun shines’. For commercial properties and large developments, finance has been harder to realise as risk associated with these types of properties is a lot higher. It can be achieved, but at a cost of increased interest rates and associated fees.