House price rose by 25% in 2021 driven exclusively by
- Low interest rates,
- The need for more space to accommodate working from home.
There was a segment of the property market that missed this – inner city units – which rose by only 8%.
Unit blocks close to the city were the opposite of what the market wanted.
As Covid shifts gears I am already seeing demand for inner city units return because,
- Petrol price at $2 per litre will mean that being close to restaurants and work will find favor again (as the Covid factor wanes).
- There is significant upside in a neglected asset class.
- Investors and owner occupiers are each looking at the same properties.
With inflation showing its head investors are looking to rent return on an undervalued asset class – it makes sense (The Australian Jan 15).
Inflation between 2-3% and wages growth of above 3% are the stated pivot points for the Reserve to move on rates – and we are not there yet on wages growth.
As has been the case in previous cycles there will likely be more talk than action on rates – given that the main aim is to alter market behavior. The message is more important than the action itself. With home loans now much larger, much less action is required.
So, what lies ahead for interest rates and how will you and I manage that?
Bill Evans (Westpac Chief Economist) predicts a rate rise of 0.15% in Aug 2022 and another 0.25% in Nov 2022.
He further predicts that the peak of this cycle is 4% (for the mainstream consumer – 1.75% from the Reserve Bank).
So, what should we do – how should we respond?
I am very clear on this – and it does not involve fixing rates.
Home loan rates were around 4% before Covid – so this is what you should do,
Start paying your home loan now as if the rate was already 4%.
- In the meantime, you pocket the difference by way of accelerated principal reductions.
- Your budget is set early and won’t be affected.
- You can then ignore the noise along the way.
Fix your repayments… not your rate.
And… This is what I will do:
I have seen this game before… I can’t prove it, but this is how I expect it to play out:
- The Reserve Bank moves 0.15.
- The banks move 0.25 crying poor about margin pressure.
- BUT… they offer no change at all for new borrowers
When I conduct my regular reviews – I will get you the rate being offered to new borrowers.
Banks cynically play the pea and thimble trick – using margin from old loans to pay for the discounts to new ones.
I will ensure that your personal rate rises kept to a minimum in accordance with my agreements with the lenders I use.
I cannot absolutely promise this – but I can promise that this is the process I will follow.
On property – in 2023 it is likely house price growth will moderate – but in 2022 – maybe have a look at inner city units again as an asset class for future price growth.
As always if you’d like advice tailored to your own personal circumstances please call or email me anytime… It’s what I’m here for.
Ask Alan – Australia’s Premier Mortgage Broker