With rate cuts likely on the horizon, banks are adjusting their forecasts. In this article, we break down what this means for your mortgage, the property market, and how to adjust your investment strategy for future success.
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Despite inflation cooling down here in Australia, there are still economists predicting no rate cuts for 2024, and there's a likely chance we don't get one until July or August of 2025.
Now, if you're someone who has a mortgage, you're probably scared right now. But I want to share some insights that are very valuable and insightful for what you can do in planning for your property portfolio journey.
If you're interested in what my thoughts are, then definitely keep reading.
Now, the latest inflation data that came out was actually quite promising. It was showing that inflation has well and truly slowed down, but it may not be where the economists want it to be.
More importantly, where the Reserve Bank of Australia (RBA) wants it to be—between 2% and 3%.
Although the latest data from September has shown a huge decrease from the previous quarter, it still highlights the need to be really committed to killing off inflation once and for all.
The problem is that everything is lagging data, and when you look at something like this, I would go on to say that even if you had interest rate cuts next month, you would still see inflation drop down further. That’s because everything is lagging; an interest rate cut or hike actually takes quite a long time to come into effect.
The best way to understand this is to think back to how it was when interest rates started climbing for the first time. It didn’t slow down inflation, nor did it stop anyone from spending more money.
In fact, what it did was just put more pressure on the market, because interest rates were increasing, but people kept spending. What it felt like was that the RBA’s monetary policy, or the cash rate going up and down, almost felt like a blunt tool.
In addition, it’s counterintuitive when you've got the RBA, the central bank, going out there and saying: Okay, we're going to do X, Y, and Z.
On the other side, which is fiscal policy—the government and the budget—they come out and say: Well, we're going to do the complete opposite.
A classic example of this is something as simple as the home builder package and schemes coming out, which then pushes prices up for everything.
On the flip side, you've got the RBA coming out and saying: We need to slow things down, like, calm down, man! So, it's counterintuitive.
It’s the same thing that’s happening right now: we have all these cost-of-living crisis relief packages, but all this really does is bring more inflation into the market—the one thing that we're trying to fight against.
What also doesn’t help is that we’re in a per capita recession, yet the markets are absolutely sending it. This is because we have so many migrants coming into the country.
Now, I’m not going to pretend like I’m some sort of economist, because I'm definitely not one. But, when you think about how many people are sitting there looking at the cash rate, thinking about what they should do, one thing I urge them to do is look at trends rather than just the number itself.
If you look at the number right now, it’s within 2% to 3%, which means they should act right now.
However, if you see that number between 2% and 3% and it comes from 7% or 8%, you’d better be cutting yesterday.
I know it’s not a very popular take on this, but it makes you question why, despite the RBA not cutting rates, the banks are doing whatever they like anyway.
The economists at the banks are coming out and suggesting that interest rates will cut a lot sooner than the RBA claims they would.
More importantly, the ones that you hold your home loans with—those banks and lenders—are already reducing the interest rates.
In a recent report from Yahoo Finance, it was revealed that:
The report stated that:
Now, this doesn’t even consider that fixed rates have been dropping really fast.
The fixed home loan rate is a very good indication of where the banks think the market will be in a couple of years' time.
You’ve got to think about this: Let’s say the home loan rate is 6% and the cash rate happens to be 4.5%.
If you go out and say: Well, in 3 years' time, we’re going to move our variable rate from 6% or 6.5% down to about 5%.
This means they’re expecting that the cash rate will go down by at least 100 basis points.
They wouldn’t be doing this if they weren’t confident, which means the rate cuts are going to come, and they’re going to come thick and fast.
Now, could we see those rates drop to record levels like we saw during the pandemic?
Probably not, but at this point, anything is possible.
We've seen a change of government overseas, and we’ve got some people really happy about it, while others really hate it.
One of the things we will see Trump do is cut rates—he wants to stimulate the economy. With that, inflation probably follows.
In addition, when you've got tariffs coming in as part of their policies, it's definitely going to create more inflation.
Another report also revealed that:
Now, when do the big four banks think interest rates will drop?
The same report stated that:
It also added that:
Now, one of my favourite things to look at is the *Australian Property Investment Magazine*, which comes out with a property sentiment report. They go out there, survey a lot of people, and come up with some findings, so I want to share that with you guys:
What's really interesting is where the numbers are skewed in the next question:
As you can see above:
Keep in mind, the people surveyed are seasoned investors as well as first-home buyers. So across the board, despite the fact that a lot of people are saying this is the top of the market, it’s a bubble, and everything’s going to come crashing down, they might be doing one of two things:
Do I see some turmoil possibly coming in the next 5 years? Yes.
What could it be? I have no idea.
We still have further to go in this cycle, and although we may see one of the biggest property booms to follow in the next 12 to 18 months, it will be followed by some correction along the way.
If you're in this market thinking that the market could only go up, that’s how people get wrecked. That’s why you need a fluid and robust strategy so that, when those things are coming, you’ll be in the right conversations to know when it’s coming around the corner.
I remember having these conversations in 2020 with a lot of people who didn’t have enough data or enough real, active experience in the market—talking to agents, talking to property managers—to know when things were moving in the next 3 to 6 months. It’s why so many people were selling at the bottom of the market in 2020 and got absolutely wrecked at certain points within 2022 when rates were so high, and Sydney and Melbourne prices came down.
However, despite those markets coming down, Sydney has hit its all-time high in prices.
That is why you’re in real estate—because you have a long-term vision for this asset class.
If you’re simply coming in here for the next 12 months, fair enough—you’re probably going to make a lot of money.
However, if you're someone in here thinking that you're here for the next 12 months but, in reality, you're here for the next 5 years, you need to start thinking longer; you need to start thinking about the bigger picture.
Why? Because I can tell you now, if I’d started 11 years ago with the thought of just flipping properties and going in and out within the next 11 years, I would have lost all my hair, and I probably would have made a lot less than if I had just simply held on and withstood all the storm and turmoil that came 11 years after that.
I hope you have learned so much from me in this article.
I’ll catch you in the next one. Thanks, guys!
Disclaimer: Search Property Pty Ltd (SP) does not provide financial or investment advice and does not hold a financial services license as defined in the Corporations Act 2001 (Cth). Any advice given by SP is general in nature and does not take into account your personal circumstances or objectives, financial situation or needs.
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