Rising Interest Rates 2022: How WA Property Investors Can Come Out on Top
With interest rates on the rise and the financial effects rippling across Australia, property investors are looking for smart ways to navigate these changing market conditions. With most economists predicting further increases into 2023 and a buyer’s market looming, property owners and investors are keen to come out on top of this dynamic new cycle.
It’s important to understand what drives these changes and to take a broad view of the investment conditions at hand. What does this mean for Perth property owners and investors?
Firstly, let’s look at the reasons for these increases.
Why do interest rates fluctuate?
After years of record low interest rates, Australia has seen four rate rises in as many months with further hikes looming
So, why do interest rates fluctuate? And why is Australia seeing these increases now?
According to figures released by the Australian Bureau of Statistics, the March quarter saw inflation rates hit a 30-year high. Currently sitting at 6.1% over the year to the June quarter, the Reserve Bank of Australia (RBA) has predicted inflation will top 7% by the end of 2022.
This comes at a time of comparatively low 2.4 % annual growth in wage rates. Low wages and high inflation are concerns for the RBA as they assess the pressure this places on household budgets.
There are several reasons for interest rates fluctuations.
Importantly, they’re connected with the official cash rate target set by the Reserve Bank. This rate can be understood as the cost of borrowing money. This cost of borrowing money is passed on to the banks’ retail customers in the interest rate they pay on their loans.
Broadly speaking:
- When the cash rate goes up, the cost of borrowing money goes up.
- When the cash rate goes down, the cost of borrowing goes down, plus
- The higher the cash rate, the more interest you earn on your savings.
Investors watch closely as the official cash rate fluctuates because this is an important indicator for movement in the property market.
So, how does the RBA decide what the official cash rate should be?
The RBA routinely meets on the first Tuesday of each month (with the exception of January) and announces any decisions made soon after each meeting. Investors keenly await this update as it provides useful guidance for investment decisions including potential challenges and opportunities for positive returns.
When making its decision, the RBA looks at several factors, including:
- The Australian Economy — Is Australia’s economic growth weak or strong?
- Inflation — Is the price of goods rising too quickly?
- Global Economies — Specifically: what’s happening with the US Federal Reserve? Being a large economy, US interest rate fluctuations often influence the rates in Australia.
So, what happens after the RBA sets the official cash rate target?
Using the cash rate as a guide, Australian banks then set interest rates for their customers. Sometimes, they pass on the full increase or decrease, but, ultimately, the banks determine the loan products and interest rates they offer their clients. It’s important for property buyers and investors to shop around to find the best loan deal available.
According to the Reserve Bank the latest interest rate hikes are likely to continue into next year until sufficient downward pressure has brought inflation in the Australian economy under control.
What do recent interest rate increases mean for WA property investors?
Despite WA’s reputation for strong economic growth and market resilience throughout the Covid-19 pandemic, the west is starting to feel the pinch of rising interest and inflation rates echoing across the country.
But are some regions better placed to weather this economic upheaval than others?
We look at WA’s economic outlook and promising opportunities for local and interstate investors and rental property owners to come out on top of this cycle.
Boost to investor activity
Higher interest rates are likely to spark an increase in interstate investor activity in the west.
With interest rates on the rise, Australian property investors are seeking promising investments in competitive markets with solid indicators for future growth. With lower median buying prices than their East Coast equivalents, Perth continues to offer excellent value for money and the option to combat interest rate increases with a lower buy-in point.
Buyer’s market in the west
With the uncertainty of rising interest rates, it’s likely local WA buyers will take a cautious approach. Demand for properties will decrease as locals start to delay making purchase decisions.
What does this mean for the WA market?
Fear of interest rate hikes means less demand
As local buyers consider the future costs of borrowing and the likelihood of higher loan repayments, the demand for properties will fall. As the market eases, investors will have more time to compare properties and make the best purchase decisions.
Downward pressure on property prices
Fewer motivated buyers in the marketplace puts pressure on property prices, meaning, potentially, better value investments with stronger buying opportunities and growth prospects for investors.
Shift in focus from sellers to buyers
During years of high demand and growth, sellers have the upper hand. As market conditions evolve, and higher interest rates curb demand for properties, a buyer’s market allows investors to negotiate on price and secure more favourable contract conditions.
Low vacancies, strong returns
Investor and landlord interest is driven by solid, reliable returns. Perth boasts an enviable reputation for low rental vacancy rates (.5% in the last quarter) and high value rents driven by a significant housing shortage and strong rental demand. Over the past year, Perth has seen rents rise dramatically with the latest Corelogic data noting an additional 2.9% rise over the June quarter with further upward movement likely. This is good news for investors.
Taxation advantages
As interest rates rise, investors may be entitled to higher loan interest deductions and larger tax refunds. While this may not result in an improvement to your overall investment return, it can have positive implications for post tax cash flow positioning. You should seek advice from a qualified tax advisor to find out how to make higher interest rates work to your advantage.
How WA investors can come out on top
As the WA property market adjusts to an environment of higher interest rates, there are plenty of opportunities to maximise your investments in Perth and Western Australia.
Understanding your options and planning for the likelihood of future interest rates rises is key to your investment success. Here are a few things to consider when planning for a smart investment future:
Optimise leasing outcomes
Keen to improve your financial position?
Whether you’re looking for a new investment or assessing an existing property, optimal leasing arrangements drive cashflow. With rising inflation and upward pressure on interest rates, optimising your leases is a great way to offset the inevitable cost increases.
Check the leasing arrangements you have in place.
- Is your property earning the best valued rent it can?
- Are your vacancy rates at an absolute minimum?
High valued rents and low vacancy rates mean better cashflow.
If you answered ‘no’ to either of the questions above — or you’re not sure about the latest market rates — contact an experienced property market expert for up-to-date advice.
A free property appraisal is a great place to start.
Arrange your free property appraisal today.
Professional partners for investment success
Choosing the right professionals to support your investment strategy is essential. Getting expert advice and the right local information to suit your individual circumstances will help you maximise your WA investments.
Successful property investors have a tried and tested team with local experience and market insights enhancing their investment decisions.
Property
Partner with a Perth-based property professional who understands your unique investment needs. Connect with a property manager who treats your investments with the same care they would their own. With years of expertise managing residential and commercial properties in the Perth region, HERE Property will work with you to achieve excellent returns on your investment.
Finances
Whether you’re taking out a new loan, re-financing or locking in a favourable rate, a financial adviser can assist you with selecting the best banking product for your needs. With interest rates on the rise, accessing the right finance for your investment at the right time can make a significant difference to your bottom line.
Taxation
Choose a qualified taxation expert to provide advice tailored to your individual financial circumstances. Taxation professionals, such as a certified accountant, can provide timely advice to maximise your post tax cashflow and improve your investment outcomes.
The final word: rising interest rates in 2022
With interest rates on the rise and inflation heading for 7%, it’s now more important than ever to maximise your investments and offset rising costs. Savvy investors will be well-prepared for these increases and ready to take advantage of opportunities as they present.
Sure, there are challenging conditions ahead. There will also be exciting potential for smart investors who know where to look. As the West Australian buying market shifts, promising investment prospects are on the way.
Be prepared.
Connect with Perth’s investment property experts.
