Many people believe that as interest rates increase property prices flatten or even fall. This belief is at times justified, due to the sentiment that property should drop when interest rates increase coupled with a very short-term drop in the auction clearance rates.
But when we look at the fundamental reason why interest rates are increased by the reserve bank of Australia and overlay this with business confidence and past property price performance, we come to a very different conclusion.
So why does the RBA increase the cash rate? The answer is increased spending!
This increased spending is not only from business but from the mums and dads spending more on holidays, clothes, cars, white goods, and renovations. When the economy picks up, inflation starts to kick in.
Inflation means increases in the price of goods, services and assets. Your clothes will cost more to buy, a haircut will cost more next month, the holiday will cost more than last year’s, your shares will increase in value and the biggest asset that most Australians rely on for wealth accumulation (their home) increases in value.
Property prices typically don’t fall when interest rates increase. As we saw towards the end of last year, property prices had already begun an upward climb before the interest rate started increasing. When the RBA says there are more increases to come, what do you think it astute investors are doing?
Ask the top 1% of wealthy retiree retirees what they did many years ago. They bought and held residential property. The next 8 to 10 years could well be the last chance to make a good capital growth through residential property for the ageing baby boomers and the start of a property love affair for Gen X and Y. If you study when interest rates started to increase and entered double digit figures in the mid-70s, late 80s and early 2000s and compare what was happening with property prices at the same time, you’ll notice that interest rate hikes coinsided with residential property prices going through the roof.
Will history repeat itself?
Only time will tell!