Right now a lot of people are sitting on the sidelines waiting for interest rates to come down before they buy a home.
But what we’ve seen, especially in similar situations, is that these decisions could actually be costing you tens of thousands. Even with the rates going up and cost of living going up, prices of property are still going up, especially around that million and below mark.
Interest rates aren’t what’s driving growth in Australia at the moment; it’s the supply versus demand.
The cost of waiting for interest rate cuts
Buying now is going to cost you $10,000 more in holding costs for a two-year period, for example, but you’re going to lose $70,000 in growth if you don’t.
There’s no one in Australia that would have more information than the RBA governor, and if she’s buying right now in a market where everyone’s telling you not to buy because of high holding costs, then what’s that saying?
Interest rates do take an effect, but growth is completely separate because there are other factors at play. It’s good to consider all things so that it doesn’t cost you money in the long run.
Why waiting for affordability is a risky strategy
It’s pretty normal to hear people saying rates are too high to buy your first home or to invest, and that they will wait until the cuts happen. Realistically, this isn’t a bad thought process, it sounds logical, but interest rates and the cost of holding at the moment won’t really affect the property prices.
Affordability is only one metric that you’re tracking to try and predict markets. If you look at markets like Currumbin, for example, it has grown by 19% this year despite high rates because the primary demographic is 60 years of age, debt-free, or equity-rich.
Managing interest rate cycles and rental returns
Interest rates are a temporary cost that will go up and down in cycles over the 30 years that you’re holding the property, so it’s not always a good idea to base your decision on those cycles.
We know the RBA is going to go too high and then too low. If rates increase, you can also do a rent review to make that up in your rental return.
Many people are paying about half a percent too high on their interest rate anyway; you can refinance and get a better rate, but people often don’t do it because it involves effort.
Understanding property growth vs holding costs
Rate reviews and rent reviews can lead to significant gains. We’ve seen that even with the rates and cost of living going up, property prices are still rising, especially around the 1.5 million and below mark because of the first home buyer guarantee scheme.
If you bought a property today at $700,000 with a very conservative 5% growth, that’s $35,000 a year. If you wait two years for interest rates to settle, you lose out on about $70,000 in growth.
Even if buying now costs you an extra $10,000 in interest, you’ve still made $70,000 in equity.
The danger of following the crowd in real estate
These are conservative figures. In the Currumbin example, a million-dollar market grew by 19%, which is $190,000 worth of equity in 12 months. I’m happy to pay $20,000 in holding costs if I’ve just made 190 grand.
Additionally, when interest rates eventually come down, the “sheep” in the market will want to buy again, driving that 5% growth up to 10%. By waiting for market signals, you’re already too late.
Once it’s on the morning news or your Uber driver is talking about it, the opportunity has passed. You need the confidence to make decisions before the crowd turns up.
Long-term benefits of compounding equity
The basics are that you can wait two years and it will cost you at least $70,000 in potential equity, or you can purchase now with a higher holding cost of maybe $10,000.
The real difference is compounding. On an $800,000 property with 7% growth over 30 years, there’s about $500,000 per annum in growth towards the end of the cycle.
That final two-year period at the end of your holding cycle is where you make the real money. The decisions you make today really affect how you retire in 30 years.
Learning from historic market growth periods
It is hard to make a decision in such an uncertain time, but we’ve seen this before during the GFC and COVID-19. After the GFC in 2009, the market grew by 40%.
Australia still has a supply issue. Demand is cooling slightly because of the cost of living, but the supply issue is not going anywhere. There are no government plans that will significantly increase supply, and existing plans are lagging behind.
Once demand picks up again, the supply will still be stagnant because people don’t want to sell and the upgrading market has stalled.
Next steps for your property investment journey
If you are interested in purchasing something soon, you can look for a free assessment to work out exactly what you can borrow.
We have included a scorecard in our bio to help people test if they are ready and understand the market. Take the test, get your score, and then you can book a call to discuss the next steps.
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