The silver lining of the thirteenth rate rise for investors

The 13th rate rise by the Reserve Bank of Australia since May last year could actually prove lucky for some – mainly those cashed-up investors.

While many home owners will face even more pain as a result of the latest 25-basis-point hike up to 4.35 per cent, there are some winners besides those losing out.

In the long term, it’s in all our interests to have inflation reined in to within the RBA’s 2-3 per cent target range rather than the current 5.4 per cent, say most experts. But in the short-term, too, some stand to gain more than they sacrifice.

“This latest rise means they’ll have to cut rates sooner to get growth,” says Scott O’Neill, founder and director of Rethink Investing and author of Rethink Property Investing. “Otherwise, the cash rate would have remained high for a longer period, so the silver lining is that it could accelerate the case for reduced rates in the future.

“And although it will mean pain for some, particularly the stressed buyers, it does mean there will be a little bit better buying conditions out there for others. If you have the cash now, the rewards will come. I have over 100 investor clients who were hoping the rate would go up as they expected it to generate more favourable buying conditions.”

Obviously, for those taking out mortgages to fund more property purchases, the cost of that money is higher – perhaps an extra $80 a month in repayments on a $500,000 loan. Some, however, are well set up to afford that additional charge.

“There’s a lot of negative gearing in investment property, so buyers aren’t significantly out of pocket,” says property valuer and investment advisor Anna Porter, the founder of Suburbanite. “If you’re in a strong cash position, then you’re in an even better financial condition.

“There will be fewer investors and owner-occupier buyers in the market now, so there will be some really good buys out there. Even if a property might cost an extra $10,000 on holding costs, you might buy for $40,000, $50,000 or $60,000 under what you might have paid, so you’re making up that cost. You’re not competing with anything like the numbers you would have done 12 months ago.”

Most commentators now agree that a further rate rise in December is unlikely, with new RBA governor Michele Bullock unwilling to be seen as the Grinch who killed Christmas. So, it’s pain now for gain later.

Yet while the rate rise could be seen as a bonanza for many investors, they should still take the time to weigh up all their options, says independent economist Saul Eslake.

“It could still be a risky time to invest in property,” he advises. “I found it interesting that the governor made a specific reference to rising property prices in her address. If migration falls back, then property price rises could slow to more usual levels. And if they don’t, then this higher cash rate could remain for longer than people realise.

“So, I suspect that people could do better with their money. You can now get almost 5 per cent by putting your money in a bank, and would you get that much, after expenses, from owning investment property? On the other hand, there will be some forced sales, and opportunities for good buys.”

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