“Timing the market” is one of the most widely-discussed property investment strategies. We’ve all heard catchphrases like:
- “Buy low, sell high”
- “Buy after the clock downswing”
- “Catch the wave early”
- And so on.
But how do you really put this concept into practice?
History provides some valuable, and exciting, clues to this answer. By looking at historical market data, you may be able to use the fluctuation of interest rates to inform the timing of your future property investment strategy.
To be specific:
According to the past fifteen years, property prices tend to increase when interest rates go down.
And, as we’re all hoping, the Reserve Bank is predicted to reduce interest rates pretty soon.
Let’s explore what this means, and why it might be a good time for you to think about buying your first (or your next) investment property.
Understanding the impact of interest rate changes
Let’s look at some theory first.
Generally, lower interest rates lead to increased property prices, primarily due to two factors: enhanced borrowing capacity and improved investor confidence.
When rates are low, potential homeowners find it more affordable to service mortgages, and investors are encouraged by cheaper financing costs. Consequently, demand in the property market rises, pushing up property values.
“That’s great, but what is *real* Aussie market data telling us?”
Historical data, from the Australian market, supports this trend. Periods following significant rate cuts often witness exciting gains in the housing sector.
- For instance, the years after the 2008 global financial crisis saw property prices rebound, fueled by lowered interest rates that stimulated borrowing and investment.
- Similarly, interest rate reductions in 2014 had a pronounced effect on the market in 2016 and 2017.
- And finally, once again in 2020, property prices surged in response to economic stimuli in 2021 and 2022.
By analysing these past trends, investors can forecast potential market movements and make informed decisions about when to buy properties.
But wait… isn’t it difficult to invest in property at the moment?
Of course, this historical pattern is exciting for investors.
However, it’s not always smooth sailing to purchase an investment property in our current lending environment, for these two reasons:
- Interest rates make borrowing less attractive
High interest rates have tightened the borrowing landscape, making it difficult for many prospective buyers to secure financing. - Regulatory measures make it harder to borrow, too
The effects of high interest rates are compounded by strict regulatory measures enforced by regulatory bodies such as the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC). These institutions mandate that Australian deposit-taking institutions (ADIs) adhere to responsible lending practices, which include applying interest rate buffers of up to 3% above the loan’s rate. These buffers are designed to ensure that borrowers can still meet their repayment obligations should interest rates rise. While this is a protective measure, it also reduces the borrowing capacity of individuals and investors, particularly those looking to purchase investment properties. This has a cooling effect on the property market, as fewer people are able to enter it.
Investors and homebuyers must navigate these hurdles by either opting for less desirable terms, postponing their investment plans, or rethinking their strategy by considering a “non-deposit-taking institution” (which is where we come in–keep reading!).
What can investors do instead? Exploring alternative lending options
In the face of strict lending criteria imposed on Australian deposit-taking institutions (ADIs), prospective property investors might consider non-deposit-taking institutions as viable alternatives.
These non-traditional lenders often operate with more flexible lending standards and may impose smaller interest rate buffers—sometimes as little as 1%.
This reduced buffer can significantly enhance borrowing capacity, enabling investors to enter the property market sooner than they might with traditional lenders.
Calculating the costs vs. benefits of non-deposit-taking institutions
Let’s say an investor takes a $500,000 loan from a non-traditional lender, at an interest rate slightly above market rates.
The difference in interest might range from 0.75% to 1.25%, translating to an additional cost of around $5,000 per year, or approximately $100 per week.
While this scenario does pose an initial higher cost, the potential return on investment should not be underestimated.
If property prices increase by 5% per year—a realistic figure in many buoyant markets—this same property could appreciate by $25,000 annually, culminating in $50,000 over two years.
In this case, the investor would pay an extra $10,000 to $15,000 in interest but could gain $50,000 in capital growth, netting a substantial profit even after covering the extra interest costs.
This calculation demonstrates that while the upfront costs are indeed higher, the long-term financial benefits can far outweigh these initial expenses if the property market performs as expected.
Ready to see if you can take advantage of this potential price upswing?
There’s no doubt that historical interest rate trends can inform future investment strategies. However, if you’re like many investors, it still might seem a little daunting knowing which way to proceed. Additionally, you may not know how to find a non-deposit-taking institution that’ll consider your lending requirements.
That’s why we have our Free 30-Minute Finance Strategy Session, where you will:
- Gain insights into the most popular non-deposit-taking institutions, and their interest rates and loan conditions, that suit your financial situation and goals.
- Receive personalised advice tailored to your unique investment goals and financial circumstances.
- Understand the implications of historical and current interest rate trends on your investment strategy.
- Develop a clear, actionable plan to move forward with your property investment or refinancing decisions.
- And more.
This no-obligation free session will be held with one of our experienced mortgage brokers.
Please be assured this will not be a thinly disguised sales presentation. On the contrary, you’ll receive our best strategic advice, specific to your situation, so you too can accumulate multiple properties without sacrificing your current lifestyle and accelerate your progress towards wealth.
Schedule Your FREE 30-Minute Finance Strategy Session Today
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Please note, the numbers and assumptions listed in this article are for educational purposes only. Individuals should seek specific advice pertaining to their unique situation and the real estate market before making any decisions.
Trilogy Funding Two is a corporate credit representative (Representative Number 506131) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237)
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).