How should you plan for interest rates changes when investing in property?

You are gambling if you play the game of trying to predict interest rates. 

 It is much safer to take a long-term view of the typical interest rates cycles and plan your cash flow around worst case scenarios.  One of the biggest mistakes in property investing is cash flow management and being put in a position where you are forced to sell.  This can become catastrophic when combined with a negative capital growth or “negative equity” situation.  Hence, it is much better plan your future cash flow around the worst case scenario and make sure you have a buffer in place.

Planning for interest rate changes

Are increasing interest rates bad for property?

This is not a straightforward question.  Many people only think about the bad aspect of interest rates; the increase in monthly payments.  Capital growth can actually be strong in a period of rising interest rates due to improved economic conditions.  Of course, there will be a crossover point whereby the level of interest rates will impact negatively on capital growth.

Are increasing interest rates bad for property?

What drives interest rates?

 As a property investor, is important to understand what causes interest rates to change.  The government uses interest rates as a lever to control the economy.  Put simply, if the economy is growing too fast, the government increases interest rates to slow the economy.  Conversely, interest rates tend to reduce in times of economic slowdown.

 The neutral cash interest rate is in the 4-5% range, which corresponds to a 6-7% mortgage rate.

What drives interest rates?

Forecast for interest rates and property prices

Global economies are still very uncertain at the moment, so I would expect a slowing of interest rate rises by the Reserve Bank. 

 In terms of property prices, in my opinion, we are reaching a level of interest rates which is starting to have a negative impact on property prices.  We are also seeing the ending of various government stimulus which have supported market growth.

 Despite this, the Australian Property market still has good fundamentals in terms of strong population growth, rising incomes, a shortage of affordable housing and a firm labour market.  Based on this I would expect home prices to increase in the 5 to 10 per cent in 2010 

Global economies are still very uncertain at the moment, so I would expect a slowing of interest rate rises by the Reserve Bank. 

In terms of property prices, in my opinion, we are reaching a level of interest rates which is starting to have a negative impact on property prices.  We are also seeing the ending of various government stimulus which have supported market growth.  

Despite this, the Australian Property market still has good fundamentals in terms of strong population growth, rising incomes, a shortage of affordable housing and a firm labour market.  Based on this I would expect home prices to increase in the 5 to 10 per cent in 2010

Forecast for interest rates and property prices