After the latest RBA meeting, economists have been busy updating their interest rate forecasts with most now thinking the next tightening cycle is about to start in June and could see interest rates move as high as 3 percent.
When interest rates rise, houses become more unaffordable as serviceability can hit a buyer’s budget.
The first impact of interest rate rises is likely to be that many would-be home buyers might not be able to buy and that will mean more people looking to rent.
I only buy properties in locations that already have very tight vacancy rates and predominantly owner occupied. From an investor’s perspective, if there is higher rental demand, that will likely put upward pressure on rents and therefore yields.
Higher rents will provide a buffer for any rate rises those investors might experience and also help in securing the yield.
The other key factor to watch out for in a rising interest rate environment is how the broader public start to react.
Typically, when rates are low and sentiment is high, everyone’s buying. It’s also a time when we see a lot of ‘dud’ properties being offloaded as there is a steady stream of buyers and limited supply.
As rates rise, the balance of power can quickly change and that puts investors back in the driver’s seat. There’s likely going to be a lot more supply coming onto the market and that means opportunistic inventors are going to be able to find some really good deals.
It also means that if there are fewer buyers and less competition you will have a lot more leverage at the negotiating table.
I like to play good cop bad cop when I negotiate and try to never show too much interest in any property. I want to find out as much information as I can and gauge what sort of interest there is from other buyers.
If you know the market and the level of competition, then you can negotiate hard and secure some very good buys in this type of market.
I recently purchased a vacant commercial property in metro Melbourne, and it was soon after tenanted out at a 9.5 per cent yield. If this property was auctioned last year, it would have probably sold for a lot more. But in this market, there are fewer buyers and a lot less competition.
Oftentimes, the hint of interest rate rises is enough to quell demand and slow down a rampant housing market. This is an excellent time to be on the lookout for good deals knowing that your hand is now a lot stronger than it was only 12 months ago.
Regardless of the overall market sentiment and what the RBA might be doing, it’s still vital that you’re buying into good areas and identifying properties that have growth potential.