Interest Rates vs Property Price

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Bill Evans, chief economist for Westpac, predicted around the middle of the year that the next interest rate move would be down. Media and financial experts alike, scoffed at this notion as a publicity stunt, or a foolish attempt at putting pressure on the Reserve Bank to do just that. But he was RIGHT. “The catalyst for the first rate cut is likely to be associated with these European convulsions, but further cuts will be driven by the combined negative impact of European events on confidence and specific domestic issues,” he said on July 15, referring to the “fragile consumer”.

Dr Evans has also said that domestic interest rates are fundamentally too high. He predicts a full 100 basis points drop through 2012.

Considering he has got it right so far, let’s assume his predictions continue to be accurate and that sometime during 2012 we won’t be paying 7% interest on our home loans but 6%.

Owner occupiers will be able to spend a little over 15% more on their homes and still have the same repayments as they do when paying 7% interest. In other words interest only repayments on a $500,000 at 7% would equal $35,000p.a. Interest only repayments on $583,000 at 6% equals $35,000p.a.

When we look at the investors’ negative gearing model, the equations become in more fascinating. Shortfall on a $600,000 property that rents out for $500 per week 50 weeks of the year, and taking into account a relatively high income tax deduction, the shortfall in the first year goes from about $200 per week to about $120 per week. Interest repayment is the single largest expense for direct property investment.

If owner occupiers are going to be able to pay more for no greater cost and more people can afford to invest in direct property, there will not be enough supply to satisfy the demand. At the moment total supply outstrips total demand and therefore the average property price for “average” property in Melbourne has fallen about 5% from its peak in April last year.

If Dr Evans is correct we would assume at least a 6- 8% increase in “average” property prices next year and the stand out properties will probably jump up 10 – 12% from their lowest point now. This will take the whole year to occur because even if Dr Evans is correct the RBA is unlikely to drop all 100 basis points in February!!

The media has been strongly focused on “massive” price drops in our property markets. They will quote anyone who says property prices will drop by 40%. The claim that our property prices will follow the United States markets shows us absolutely that they have no idea what they are talking about. The markets could not be fundamentally more different. And the fact that we have a total property shortage, a growing economy, growing population and such affordable property means that there will need to be a price correction. AND IT WILL NOT BE DOWN – IT WILL BE UP.

Now and the first quarter of next year will be the best time to buy property in the strongest market in Australia. The best suburbs in Melbourne will most likely show a tremendous appreciation over the next 3 – 5 years.

If you are considering a property purchase please come in and have a chat to one of our experienced advocates.

Ian James
JPP Buyer Advocates

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About the author

Ian has been operating his own businesses for more than 25 years. During this time the self taught lessons of building the business, dealing with staff, suppliers, clients and economic woes have been invaluable. Ian is a fully licensed Real estate Agent, a member of the REIV and registered with the Business Licensing Authority.

Buying property is not just sticking up your hand and outbidding your rival. It is an emotional, fiscal and psychological decision that needs to be planned and well executed. Ian is usually involved in over three hundred property negotiations per year; ranging from the $250,000 first unit purchase for a young couple to multiple million dollar residential developments. Ian's business background and endless numbers of negotiations make him one of the industry's leading negotiators.

Ian is married with two adult children, living in Patterson Lakes. He is a keen fisherman when weather and business allows the time.