Why rising interest rates create the best property buying opportunities

The past 50 years have shown that the economy and real estate market are intrinsically linked and tend to follow a fairly predictable journey.

Periods of an upbeat economy are followed by periods of sluggishness, and sometimes even recession.

Interest rates follow a similar path. When the economy is strong, there is always the risk of inflation, so the Reserve Bank raises interest rates to slow it down and maintain rates within a target 2 to 3 per cent range.

Conversely, when the economy is weak, interest rates are lowered to stimulate spending and pump life back into the economy. It’s just the natural flow of events, not just in Australia, but indeed worldwide.

At present, there is a lot of conversation around interest rates. The media follows them closely and most observers align interest rates directly to the housing market. That’s because a high proportion of Australians have home loans, and rate changes impact them significantly.

What is often overlooked is the real opportunity presented by rising interest rates.

Opportunity amidst the doubt

So often media coverage portrays low rates as a “great time to buy,” and indeed, from a borrowing capacity perspective, this is true. But lower rates also attract significantly more buyers into the market, creating upward pressure on prices and greater competition, making it harder for many to purchase property.

What’s never promoted is that rising interest rates, while seemingly a disadvantage due to higher loan repayments, actually create the best opportunities for buyers.

The great benefit is that many people who would like to buy think negatively about rising interest rates and so drop out of the market, and therefore those left in the market have fewer buyers to compete with, which gives them greater bargaining power with sellers.

Motivated sellers may drop prices for various reasons, shifting the market from a seller’s market to a buyer’s market.

Currently, inflation dominates the interest rate environment.

After several rate cuts over the past two years, we saw inflation rise to 3.8 per cent in January, and geopolitical pressures, such as conflicts in the Middle East, are likely to push rates even higher. But this is precisely the time prospective buyers should be embracing the market.

Anyone who has studied interest rate trends over the past 50 or more years will see that while rates rise for periods of time, they always eventually drop.

Purchasers need to understand that the life of their entire loan will involve the natural ebbs and flows of rates - rises, falls, and rises again.

It takes a degree of courage to start house hunting when interest rates are rising, but be assured that is when the best buying opportunities exist.

This particularly applies to property investors.

Over the past four to five years, emotional homebuyers have dominated the market, willing to pay prices above what most investors would. It’s the emotional buyers who will start to slow in this market, creating opportunities for investors.

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