Why Interest Rates Don’t Matter to Smart Buyers- March 2024

By Rich Harvey, CEO & Founder, propertybuyer.com.au

If talking about all things real estate is Australia’s favourite past time, then surely speculating about what’s going to happen with interest rates ranks a close second.

Is the Reserve Bank done with hiking the country’s official cash rate? Is the inflation war finally won? Or is there still too much uncertainty, leaving the door open to even more pain for mortgage-holders in the year ahead?

Ask half-a-dozen boffins and pundits and you’ll probably get six different answers, such is the nature of the economic landscape these days.

But smart would-be buyers – and savvy players already in the game – can be assured of one important thing. It doesn’t really matter.

Having a smart strategy

There’s no denying the current rates landscape is putting pressure on household budgets. The Reserve Bank’s aggressive approach to getting inflation under control has added a pretty penny to the amount borrowers repay each month.

I’m not about to cast judgement on those Australians struggling. I also believe there’s little benefit in playing a blame game, which only rubs salt in the wounds.

But what’s happened since May 2022 is a cautionary tale for all would-be homebuyers.

The lesson to learn is that good times never last forever – the good time in this case being an official cash rate of just 0.1 per cent. And the second lesson is that the good can evaporate pretty quickly, with the Reserve Bank’s rate now sitting at 4.35 per cent less than two years later.

That’s a rapid reversal of fortunes.

But smart buyers and investors know that property is a long-term proposition. Those needing conditions to be at a certain setting for a short period of time, like two years, are playing a dangerous game.

Smart homebuyers and investors purchase within their means and have a good buffer in place to help weather any budgetary storm clouds that might gather. It might be a job loss, a change in circumstances, a market downturn, and indeed a swift four per cent lift in interest rates.

They know their personal circumstances, they’ve considered all possible outcomes, they’ve sought independent and expert advice, and they’ve listened. Their finances and portfolios are structured appropriately and safely, in a way that suits their risk profile.

In a nutshell, they haven’t bitten off more than they can chew – today, tomorrow, or two, four and 10 years from now.

Thinking for the long-term

As popular as reality shows like The Block are, they rarely – if ever – reflect real estate reality.

Experts can and do make decent profits from flipping old clunkers and there are some who do relatively well from speculating and engaging in risky wheeling and dealing. Good luck to them.

But real estate shouldn’t be treated as a get-rich quick scheme. Homeownership, while a challenge, shouldn’t be a precarious house of cards built in the middle of a cyclone. Decisions must be guided by smart and sustainable long-term thinking.

You can create future financial security and family wealth, for sure. People’s homes form a major part of retirement stability in a way that superannuation alone can’t. But if you’re after a Bitcoin-style investment model, I’m not sure brick and mortar is for you.

And you’ll definitely be sunk by shifts in the market, such as interest rate movements.

Would-be homebuyers and investors looking to get into the market should work with specialist experts, like an independent buyer’s agent, to put themselves in the best position for success.

A buyer’s agent can help you pick the right asset for your goals. They’ll work with you to identify what it is you want and need – a first home, a bigger house for the kids, an extra revenue stream, strong capital growth potential, a smaller place when the nest is empty – and figure out a strategy to get you there.

Their advice and guidance will help to minimise any short- and medium-term shocks that might occur, like dramatic interest rate movements. By focusing on the long-term, those blips on the radar won’t matter as much.

A long-term focus is worth it

Fast forward in time a decade or two, and this current period we’re in probably won’t rate much of a mention.

I mean, how often does the Global Financial Crisis and its devastating impact on home prices, investment markets and super balances come up in conversation these days? It’s a historic and cautionary sidenote 16-odd years on.

But at the time, it felt like we’d never not feel the effects. It seemed as though things had fundamentally changed forever.

That’s short-term thinking. Smart buyers and investors, those with a focus on the long-term, kept cool heads and calm hearts. I’m sure they reassessed their strategies and portfolio structure to see how they were placed, but then they probably carried on.

A few years back, research house CoreLogic did a deep dive that speaks volumes. It examined 30 years of market movements across the country and came to a pretty compelling conclusion.

From 1992 to 2022, there were six distinct cycles identified, with each of the upswings and downswings driven by various factors. Economic shocks. Political shifts. Taxation reform. Global fiscal conditions. And the good old Reserve Bank.

Despite six instances of upheaval, home values in that 30-year block increased by a staggering 382 per cent. That equates to an annual growth rate of 5.4 per cent.

In the final decade of the period examined, which included the tumultuous Covid pandemic, home prices surged by 72 per cent.

CoreLogic’s conclusion from the research sums it up beautifully: “Overall, the long-term trends highlight the cyclical nature of housing markets. Changes in housing values over decades are a clear reminder that time in the market is more important than timing the market.”

It’s certainly a lesson well learned by buyers’ agents who have years of experience in the market. As such, having a professional on your side to help you maintain a long-term perspective, and bring your goals strategy and goals into sharp focus, is crucial to success.

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