Mirror, mirror on the wall, will interest rates rise or fall?
No witch, no knight, no woods in sight; this tale of monetary policy is far more sinister.
Okay, maybe Im getting a bit carried away. What I do know is that the direction of the next interest rate movement leaves investors and mortgage holders, many of you reading this now, feeling more than a little bit anxious, particularly with recent changes to investor lending policy. What we know with certainty, however, is that over the past three decades, property markets (particularly those of our capital cities) have outperformed the equity market over the same period. All that in the face of deafening noise that included:
The removal of negative gearing in the 1980s
The introduction of capital gains tax in 1985, forecast at the time to decimate property markets
The introduction of the GST in July 2000 and its application on the new home market exclusively
The recession we had to have, financial meltdowns and political instability
Had you invested in an Australian capital city between 1980 and 2015, you wouldve had the opportunity to claim your stake of a property market that increased tenfold at the minimum. So much for that bubble, right?
The Rates Crystal Ball
As expected, the cash rate remained at the historically low 1.75% when the board of the Reserve met earlier today. For all you investors out there, this means that the holding costs of property investment remain lower now than at almost any point in the past decade.
Where are rates headed, I hear you ask? A look at the yield on a cash rate futures contract is a good place to start:
ASXs 30 Day Interbank Cash Rate Futures contract(fixes an interest rate on a certain sum of money for some point in the future), based on the Interbank Overnight Cash Rate published by the Reserve Bank of Australia, allows users (banks) to hedge against fluctuations in the overnight cash rate and better manage their daily cash exposures. Monthly contracts are available up to eighteen months in advance, and essentially provide an expectation of the direction of the cash rate. You can see in the figure below that the yield (interest rate) on cash rate futures contracts is declining to October 2017 indicating that the market (money traders at a bank) anticipates a high probability of a reduction of rates within the next financial year. Beyond that point, the forecast for rates is upward trending (albeit, long term projections tend to be less accurate).
Where To From Here?
So whats the moral of the story? Ask that mirror on the wall what the key to long term investment success is and the likely answer would be stress testing. That means ensuring you can hold your investment in an environment of increasing rates, high vacancy rates or low rental growth. Its your ability to hold an assetlong termthats the key to growth. Next time you read a headline that insists you retreat to the safety of a bunker until the uncertainty subsides, know that procrastination doesnt only rob you of opportunity it also costs you money.
Get active, speak to your eChoice broker and establish a professional support network.
Written and Sponsored by Blue Wealth Property
Blue Wealth Property, property investing is a very powerful way to create wealth and our research is the foundation upon which we have supported thousands of Australians worldwide.