Buying property with rates at 0.25%
Buying property with rates at 0.25%
There might be plenty of uncertainty in the air at the moment on the back of the coronavirus, but one thing is for sure - in Australia, we have the lowest interest rate environment in our history.
On the back of the emergency rate cut from the RBA, the official cash rate is down to a record low 0.25% and mortgage rates are in the 2’s on a range of home loan products.
However, investors like certainty and at the moment, that is hard to come by. For the most part, interest rates are now so low that it is cheaper to buy a house or apartment than it is to rent in many areas of the country.
So when the dust settles from the coronavirus and the associated clampdowns on certain industries and businesses, the opportunities for value investors who are looking to pick up a bargain could be plentiful in the months ahead.
Fortune Follows the Brave
Steve Douglas, Executive Chairman at SMATS Group, believes that while ‘fortune follows the brave,’ investors still need to closely assess each opportunity.
“The first thing to assess is whether or not the buying opportunity is greater than the risk.”
“It may be that it a particular property you have been looking at for ages is finally now for sale and you are afraid of missing out, it may be the discount is now too tempting to resist.”
“There is no doubt we are in a period of great risk, with no one knowing how long or how deep the physical or economic effects of Covid19 may be. So be sensible in your assessment and ensure you feel justifiably compensated for any risk.”
Mr Douglas also thinks that certain elements of the market, such as owner-occupiers have the opportunity to be more active.
“With interest rates so low, it is a great time to be buying and borrowing for property, but you have to assess low holding costs against the risk of price reduction.”
“You may well consider that the deal is at or near lowest price point, so that may give you comfort, but if you also really like the property then that will also provide emotional support even if there is a further temporary reduction still to come.”
“If you have a genuine need to buy a property, such as upgrading your family lifestyle requirements or downsizing, then this may well be a period of great opportunity.”
“You certainly would be more active for a lovely property that you would live in, rather than one purely for investment.”
Mr Douglas also says that borrowers need to understand the lending environment at the moment.
“Banks are likely to be much more conservative in their lending terms at the moment.”
“The low interest rate now should not be considered a long term advantage and justifiably the banks will factor in future rises in their servicing assessments.”
Banks Propping Up Owner Occupiers
Helen Avis, Director of Finance at SMATS Group, says that with the moves from the RBA and the big banks there are some segments that will clearly benefit.
“Even though the RBA cut rates last week, from what we’ve seen most of the lenders have passed on massive reductions for owner-occupiers.”
“But we haven’t seen many banks pass on variable rate cuts, so it’s been about helping owner-occupiers and helping business owners. They’ve also increased term deposit rates.”
Helen Avis says that despite the uncertainty, there are industries that will remain strong.
“We all hope this will be a short-lived experience. The Government has stepped up to support many of the businesses and staff directly impacted and some people will be more fortunate than others to be in industries that remain in demand or have limited financial impact.”
“We are already seeing some new jobs becoming available such as BHP who is looking to hire 1500 people. Telstra looking for 1000 people, Coles are looking for 5000 people so there are alternative jobs out there, and once movement returns to normal we can hope that the jobs lost will quickly be reinstated.”
Uncertainty in Markets
Steve Mickenbecker, Group Executive, Financial Services & Chief Commentator at Canstar feels that this is either the best time to look to buy property or the worst.
“Clearly this is the best time to buy because repayments are low, but it could also be the worst time to buy if this turns out to be a deep recession that goes on for a couple of years.”
“There are probably some buyers out there, which likely includes investors, who will say ‘I don’t have to move now so I might wait’.”
“So there are some good reasons to jump in, for people like first home buyers, but it might also be worth waiting a few months. Because uncertainty is bad for all markets.”
Mr Mickenbecker believes that rates will stay low unless there is a tightening of credit in wholesale markets.
“I can’t see interest rates going anywhere in the near future and the RBA have already said as much. So the cash rate will stay low for an extended period of time.”
If the RBA can succeed with QE, I’d expect reasonably stable home loan rates going forward. I suspect they are at the bottom at the moment. But there is some risk in credit markets as we saw during the GFC.”
Buy When People Are Fearful
Professor Peter Phibbs, from the University of Sydney, believes that buying property at the moment is an option for those with secure employment.
“It’s a good time if you’re looking for a bargain, but I might wait a bit longer. If you’re a seller, you’re probably kicking yourself that you didn’t sell before Christmas.”
“If you’ve got a steady job then this is probably a good time. As they say, always buy when there’s fear in people’s eyes.”
“People will have to judge their own situation. If you’re forced to sell, clearly there will be fewer buyers around at the moment.”
Professor Phibbs suggests that even though interest rates are low now, they will go up at some stage in the future.
“Money is cheap - but I think the story has got further to go. If I was interested in buying, I think you could get a better deal in a few months time than you are at the moment.”
I don’t see money getting any cheaper than what it is now, but the downside is that it won’t always be this cheap over the lifetime of their mortgage. So they need to have the financial capacity to deal with an increase in interest rates.”
“So the house might wash its face at the moment, but in 10-years time it might not.”
Property is a Long-term Investment
Leanne Pilkington, President of the REINSW says that people have to remember that property is a long-term game and despite short-term headwinds, people always need somewhere to live.
“There is no doubt that this is a short-term problem. Obviously this won’t be over in the next few weeks, but property is a long-term investment.”
Leanne Pilkington feels that rates will be low going forward and that will spark buying opportunities.
“I can’t imagine any banks putting interest rates up outside of the RBA, at least through this crisis. And every indication is that interest rates are going to remain low for some time.”
“So I think that given that interest rates are at record lows and there are properties still on the market, so there will be good opportunities.”