Recent data suggests interest rates won't be cut in 2024 due to persistent high inflation. This could mean missed investment opportunities as asset prices rise, but high rates may sustain rental and property values. Potential tax cuts could boost market demand. Adapting and staying positive is key to seizing investment opportunities.
Is it safe to assume that interest rates won't be cut in 2025 based on the latest data that's dropped?
Continue reading and see the shocking results when it comes to property prices!
Now, there are a few things that exhibit high volatility that you need to consider as we build a real estate portfolio.
We have been talking about inflation for years now. At this point, you might be getting sick of it. But learning more about inflation is still very important. Why? Because what you're more concerned with is not so much about inflation—it's the interest rates!
Inflation and interest rates are closely linked to each other.
How? Simple….Economics! If inflation is high, interest rates will be high. But when inflation decreases, interest rates should also decrease.
At the start of 2024, many predictions emerged, suggesting that:
However, this timeline has since been extended to about September or October of this year. Australia was projected to follow suit approximately 1 or 2 months later. Based on the latest inflation data, it now appears likely that:
We may not see a rate cut in all of 2024.
But…Is this something that should scare you?
Or…Is it something that should excite you?
Well, there are always pros and cons and opportunities in markets. So, if you're sitting there and thinking:
“Oh, that means I can't invest.”
“Something’s happening around the world—oh, there's geopolitical issues I can't invest!”
Well, the REALITY is markets CONTINUE moving.
Not everything moves at the same time. But one guarantee remains:
Now, you may be thinking: “Oh my God! My dollar is gone, so I better go to the bank tonight and invest it!”
However, it doesn’t happen overnight. It happens over time, and there is not much in life that is guaranteed apart from:
In this case, your purchasing power is definitely going down. So, over time, you said: “I'm going to sit on the sidelines for, say, four years.”
Let's use the last four years as an example…
Not only would you have seen the dollar value reduce, but you would have also seen asset prices increase! So it's harder to get into assets mainly because:
Now….you might be thinking: “Hey, why am I paying taxes when the government can just go print their own money?”
Let’s talk about interest rate cuts in 2024. What does that actually mean? Well, there are a couple of things that I want to focus on. Let’s factor in that “interest rates don't cut in 2024.”
What happens now?
We have tax cuts that are coming so people can afford to buy more. What I mean by that is….Since the amount of tax you are paying will decrease, you will have more of a disposable income. Because of that, one of these two things may happen:
And all these will lead to more demand coming into the market. Now, what happens next is:
In addition to that, you're also going to get a lot of optimism coming to the market when we have an idea of when the US will cut their rate. Now, at the moment, we're probably taking two steps forward and one step back because you say: “Okay, well, interest rates are definitely not going up, and we're probably going to see a cut now.”
Now it’s like: “Okay, we're probably not going to cut, but we definitely aren't going to increase rates now.”
If we suddenly see another increase in inflation…and it goes a little bit higher, the idea of another interest rate hike gets put on the table.
I'm just giving you a disclaimer that this is very selfish of me, but…I'm actually interested in having the interest rates stay higher for longer now.
Why? Well, it’s because it gives me more time to accumulate more assets before the mass FOMO kicks in. If I look at this as an asset owner right now, I could say:
However, if the value of my property has increased, it's likely that prices have risen in other areas as well, making it more difficult to purchase property. Right now, my thoughts are if interest rates do remain high for longer, the following are the few things that will happen when it comes to real estate:
That’s what we've seen in the last 24 months. If you picked the right locations, you've done really well.
If you pick dud locations, you're sort of moving sideways but you're not dropping off.
If you're buying units in an area that's high density and you listen to an uncle, well you're pretty much screwed.
When it comes to rents, they are probably going to go up as well. But because I have Investments and I'm investing the rest of my money, I have my properties all go up in value in terms of the rents that they have.
The latest data is also proving the same thing!
“The median rent for both houses and units across Australia's capitals hit another all-time high in the March quarter per Domain.”
“In all capitals except Canberra, asking rents for houses have been higher; for units, only Hobart has yet to hit a record high.”
“Asking rents have hit record highs in almost every major city in the nation and the growth in the March quarter was the highest we've seen in 17 years.”
Okay….17 years guys. This is MASSIVE! Why? Because this time is actually different.
When you look at previous cycles you're saying: “Okay, well we can just have incentives for people to go out there and build more property.” We should be okay!
But right now, you've got:
So this time is different…and I know they are like the worst things you could say when it comes to Market Cycles. But, every cycle is very similar. In this case, we’ve seen something that is playing out differently.
“Home loans for new homes have fallen 2.1% as mortgage demand picks up.”
“ABS numbers published on Monday, showing an overall 1.5% increase in mortgage commitments from January to a seasonally adjusted $26.4 billion after 2 months of declines hit the disparity emerging in Australia's housing markets.”
So, what we're seeing right now is: “Yes people want to take mortgages to buy places.”
But, it is to buy existing homes NOT new homes. That is a big difference between the two. If you're just buying existing stock, there are 3 options.
Now, let’s say…you're going and creating new stock that has more supply in the market. In this scenario, you're buying existing stock. This doesn't mean the supply increases. It remains the same. When it remains the same, there’s a couple of things that could happen.
Let’s say for example:
But what happens if it's the opposite?
What happens if an investor sells their property and an owner-occupier picks it up?
That means: one less property available to rent.
This is what starts pushing prices higher when it comes to rentals. This has been playing out for the last 24 to 36 months in so many suburbs. I've seen growth in some of these suburbs by 20 to 30% when it comes to rental growth over the last 12 months.
So, if you're an investor and you're seeing 20 to 30% increases, you're like:
“This isn't so bad when it comes to interest rates because at some point we probably will see the economy slow down.”
“We will probably see inflation actually get sorted out and we will probably enter a deflationary period.”
When this happen, we're going to see interest rates fall. What do you capture in the first phase? Yes, your rents go higher….and yes interest rates are higher so it's annoying! But what you can do is during that time, you can accumulate what you need.
Once you see those yields increase, and THEY WILL because:
You don't necessarily see property prices going up by the same amount in the next 12 months. What will you see? YIELD SUPPRESS.
When yields are suppressed, the value of a property you are buying is not as nice. This is because you're going: “Hey, I could have bought in this area. It would have been a 6% yield! Now, I'm getting like 4 1/2 to 5% that's sh!t”
But, in 12 months time, when you see the next rent rise, you're going to see your yields increase. And if you happen to just go: “I'm going to wait for 12 months, waiting for those yields to increase." At this point, you're still paying an extra 10 to 20% higher on the property price.
That is significantly WORSE than the negative cash flow you would have experienced for the last year.
To recap: If we see interest rates remain high for longer, you can still win. If interest rates fall in the next 6 months, you still win. Now, you're probably thinking: “This makes no goddamn sense! Why can I win in every situation?”
The reason: That’s what happens when you have a winning and optimistic mindset!
I'm NOT saying: “Go out there and buy anything.”
I'm saying: “You need to have a winning mindset.”
To have one, you need to be adaptive. As an adaptive investor, you're making money:
This is the reality of someone who will go out there and outperform every single market, every single time. There’s going to be some speed humps along the way! But if you're positioned well and you have the right risk mitigation tools you can win.
That’s why it is super selfish of me to come out and say: “Well, look, I don't actually mind if interest rates are higher for longer.”
In fact I've got clients right now going:
“Hey, before the interest rates start cutting, can I go and purchase that one more property?
“Can I go back to my broker and ask for that one extra pre-approval?”
It's just trying to squeeze out as much as possible before the inevitable influx of liquidity into the system.
Money is going to get printed again. If we don't see that—--the whole world is collapsing anyway..
So buying a property is probably the least of your worries.
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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