Interest is Rising
With the opening of the borders, interest is rising in the Perth property market; which is good news for investors. However, where investor’s attention should be focused is on the Reserve Bank of Australia and the likelihood of interest rate rises in the coming months and years. Most of the banks are now predicting a rate rise in May with follow on increases to come. The forecast amount of the increase varies, but all agree that it is coming and this doesn’t include banks instigating their own ‘out of cycle’ rate increases.
Interest rate rises need to be taken into account when you are calculating the feasibility of an investment project. Most banks already use an inflated interest percentage when assessing a borrower’s ability to service a loan … and you should too. Working your figures on the current interest rate will only set you up for a nasty shock in the future. If you build in a couple of rate increases up front, say 2 – 3%, you can be more confident of your investment being profitable. On the bright side, stock availability and vacancy rates in Perth remain low, which is driving rent and property values higher. Meaning any increase in interest expenses will likely be covered by capital gains in the long term. If you work on the premise that you will still make money and/or break even if you have to ‘fire sale’ the property or cover holding costs while trying to sell or rent, then you are already in front.
Property investors should always take into account their own unique circumstances. Building solid relationships with a chartered accountant, financial planner and bank relationship manager who are all experienced in property investment makes your starting position even stronger. Undertaking in depth feasibility studies based on their advice will protect you in the long run from making poor investment choices. That’s not to say that some investments that look good on paper always perform as expected or vice versa but failing to plan is just planning to fail. In this current and upcoming market, planning for successive interest rate increases just makes good sense.