My property advice? Lock in your rates now. Things are changing

Property Advice

Lately, there’s a conversation I’ve been having with a lot of our clients. When they ask for property advice, there’s one thing that I tell all of them: You need to lock in your financing now, before a sudden change hits.

In fact, we’ve been suggesting that property investors lock in their interest rates since as early as April, but our current economic situation means that the advice is now more urgent than ever. 

It’s also been a little while since our June 2021 Property Update. That’s why I wanted to give you all a brief update about what’s going on with residential & commercial property at the moment, and why the RBA is dead wrong about interest rates staying where they are. 

The residential property boom is slowing down. Change is coming.

A combination of record-low national interest rates and economic support packages have contributed to a massive boom in the residential property market over 2021. But that growth cycle is slowing down, as affordability continues to decrease and stock shortages begin to appear.

Currently, the number of people refinancing their property is still at an all-time high, with investors rushing to catch the wave. A recent report from CoreLogic shows that over the last 12 months, national house values rose by a whopping 18.4%, making affordability a major issue.

That’s the fastest growth since 1989. Yet we all know what happened right after 1989 – the wave crashed and there was a gruelling recession. 

Read More: The economy is struggling. You need to lock in your business financing now.

Right now, with our economic fundamentals skewed, we’re facing down a similar situation. Money is worth increasingly less and property prices have skyrocketed, yet the actual economy is struggling badly under the stress of brutal lockdowns. 

I’ll talk about this in more detail shortly, but right now, the message for residential investors is clear: Lock in your rates now before the recession hits. Historically, interest rates tend to go up suddenly and unexpectedly, and you’re likely to miss it if they do. 

Of course, there are small pockets of Melbourne that generally always do well, and they’re likely to keep performing steadily now. Box Hill and Balwyn are good examples. On the other hand, some areas obviously face a more uphill battle. A Southbank or CBD apartment is not likely to do well. 

That’s why now is the time to reconsider the ongoing costs of the properties in your portfolio. Some Melbourne properties could see yields as low as 1.5%, and is that really worth holding onto?

This property advice is based on hard data and economic forecasts. However, it’s worth remembering that the future is always speculative and open to change. If our international borders are able to open up in earnest, we may see a huge influx of international investors coming through the floodgates and shifting the scales.

What about commercial property advice? Well, now is the time to choose carefully. 

Not to keep banging my drum, but our main piece of advice to commercial property investors is much the same. You absolutely need to be locking in your financing now, so that you know what to expect amidst rising economic uncertainty. 

Don’t let yourself get caught out with a commercial loan you suddenly can’t afford. Even if the current conditions miraculously stay the same, knowing that your interest rate will stay fixed for a set period will still help you sleep at night. Leaving it open to change makes it so much harder to plan financially for your future.

Read More: Financing your business? 5 things to know before you look for a lender.

On the other hand, if you’re considering buying commercial property but you haven’t yet, it might be wise not to rush in. Locking in the rate on your existing loan is one thing, but taking out a new loan is another thing altogether. With uncertain times ahead, it might be more prudent to wait and see what happens instead.

This is especially true for property in iconic city-fringe retail strips like Brunswick St, Chapel St and Sydney Road. While High Street retail might seem appealing, tenants right now have a million different options and you may struggle to find a secure tenancy.

 For instance, our office is located just off a busy Church St shopping strip, yet the building across the road has laid empty & unleased for a full year. Lockdowns have caused an unprecedented surge in online shopping, growing by 26.9% in the 20-21 financial year. It follows that bricks-and-mortar retail districts are struggling to cope.

Now is the time to be very careful about what you’re buying, and what you hold onto. Think hard about your property portfolio right now – what’s still going to be profitable 5 years down the road? 

Yes, The RBA has said interest rates won’t change until 2024. Here’s why we don’t agree. 

You may be reading this thinking “Hang on Justin, didn’t I read somewhere that the interest rate is going to stay the same for a few years?” Well, yes and no.

It’s true that Philip Lowe – the director of The RBA, who sets the rate – has made it clear the RBA isn’t expecting conditions for a rate rise until 2024. He expects the current lockdowns caused by the Delta strain to ‘delay but not derail’ our recovery

Yet it remains difficult to see how this scenario is going to be possible, given the current economic forecasts. While we’re generally supportive of the Reserve Bank, I’m heavily inclined to disagree with the RBA on this one – and I’m not alone. As Bloomberg reports, the Australian overnight index swaps (OIS) show that market investors have factored in at least two expected rate rises before 2024.

Other leading economists are also sceptical of the RBA’s recovery optimism. Most seem to agree that prolonged recession is inevitable and that our current economic levers aren’t working. Not to mention the country is still deeply mired in lockdowns that are laying waste to our small business sector. 

As Saul Eslake writes for AFR, in a lot of ways this recession is already here. Suggesting that lending & financing conditions aren’t going to change or worsen as a result seems misguided at best. 

That’s why it’s so important to lock in your property financing now, just in case. In the last 25 years, I’ve personally only been caught out by a rate rise when I least expected it – and I’m sure many of you may feel the same. 

You don’t want to wake up one sunny morning to find that your repayment costs have skyrocketed. My advice is that relying on unchanged interest rates until 2024 is a strategy that may end up costing you a lot of money. 

I hope this property advice has been useful to you. With over two decades of commercial real estate experience, I’m committed to keeping our clients aware of what’s going on in the property market right now. 

Are you looking to make changes to your property portfolio, or review your business financing situation? Get in touch with one of our business advisors today. They’ll help guide you in the right direction. 

The information in this article is of a general nature. It does not take your specific needs or circumstances into consideration. You should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions.

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