Interest rate rises and the property market

Crown Money, where we show you how to pay your home loan off in up to half the time of a normal bank loan. Welcome to the Crown Money podcast. I'm Jessie Edge. G', day, Scott. How you going, buddy? Terrific.

Fantastic. Tip top. Couldn't be better, couldn't be better. How are you?

Yeah, going well, going well. I think something that everyone's really kind of been talking about lately is obviously the interest rate rises. And we just wanted to kind of delve into what effect that will have on the property market and what does that look like over the next six to 12 months?

Yeah, really good point. So how this all works is as rates go up, you cannot borrow as much because the banks look at your income. So to debt. And if your debt repayments are going up because your interest rates go up, that means you can't afford as much money. And so the way this works is access to credit. The lower rates are, the more people can borrow. And so over Covid, the rates were the lowest they've ever been and people could borrow the most they could ever borrow. And they did. We had people calling up saying, Scott, what's the most I can borrow? And let's say I said it was a million dollars. They go and borrow a million dollars. They don't say, okay, thanks, it's good to know, I'll borrow 800. They take the whole brick. And so everyone's fully stretched at the lowest rates now we've got rates moving up and they will continue to move up like we've bottomed out. There's no more down. This is rate rise, rate rise, rate rise, rate rise. I think you'll probably see maybe a rate rise every two months for the next year at least. And so that's a lot. And you're going to get, it's going to become more and more fear based. But don't worry about it, as you're a Crown client, you've got equity and we're in the shortest loan term possible. But when people can't borrow as much, they can't offer as much when they're buying properties. And if they can't offer as much, that means prices won't continue to climb. And as a result of that, what I've seen over 20 years is as rates go up, prices come down. And that really comes back down to is, yes, your property is going to be worth probably less than what it is today in two years time. That's a guess because people won't be able to borrow as much in two years time as what they can today, thereby that can't put as high a price on it.

Absolutely. It's all about demand, isn't it? There's going to be less people showing up to auctions, less people showing up to home opens. It's just they can't get the money to be able to afford it. So they can't keep outbidding each other or, you know. Cause we've seen prices go absolutely bananas over the last year. Like, it's incredible. And so, I mean, a lot of places will see, you know, those property prices level out, not necessarily go down, but generally speaking, I think I read something the other day where they're saying, on average next year it'll be about a 9% downturn across Australia. But obviously different pockets will have different amounts. But it's just something to be mindful of that we're probably. We've hit relatively the peak of the property market.

Absolutely have. Definitely.

Yeah. And as rates go up, property prices will stagnate.

Yeah. Go down. And so what you touched on there, which is really important, Jess, is you talked about demand and demand will fall because people don't feel that they can make money out of property. So they won't go and look to buy an investment property or two or three or four in the short term because they'll think, oh, I'll wait until prices come back and I'll buy cheaper. And so that means that demand is down. But what actually happens on the other side of the fence is supply is up. You got people who have. Have investment proofs like, oh, oh, if this is not going to be growing for the next few years, I might as well sell it now.

Yeah. Or if their interest rates are going up and they can't afford it anymore, you know, all of a sudden their calculations don't work out and they're like, shit, I've got to offload this property, I've got to get rid of it. And so they start to do those fire sales as well.

Yeah. And so people have stretched themselves. But what they didn't take into account in those borrowing capacities by the banks. Yeah, they assess it 2% higher than the rate or whatever it may be. Some banks assess it at 4% higher. What they did not take into account the cost of people's everyday living expenses going up so quickly. I mean, you look at petrol prices, you look at the cost of your groceries, you look at, just because these supply chain issues, a huge increase in your just everyday living costs. And so I think that's where it's going to catch people off guard is, yeah, I could have actual managed the debt repayments if all my living expenses were sort of stagnant or stable. But because people are now spending more on their everyday living expenses, that coupled with rising rates, coupled with their credit card debt or their car loan or all the other stuff that they would have accumulated when things were flush. You know, every government's giving out money. I mean, I got some clients, had friends who were. They set up an ABN over in Perth. There was no Covid in Perth and they were getting paid 750 a week for like six months.

Yes. Yeah.

Even though there was no Covid in Perth. It's crazy. And so just because they had an abn, they registered a year or two ago and it didn't have any income. And then they said, yeah, hey, I've lost some income because of COVID So everyone's been flush, everyone's had more money than what they normally would have. And so I think for a lot of people, Covid gave them more than what it took.

Financially. Absolutely.

Yeah, financially. I mean, especially those people in Perth didn't really feel it too much. Obviously us little poor caged birds in Melbourne, we took the full hit. You know, we were the most locked down city on planet Earth. Do you know how many cities are on planet Earth, Jess?

There's a lot.

4,600. I think it's close. I think it's close. It's 4,000 plus. But to be in the most locked down city on planet Earth is brutal and definitely has had an effect on a lot of people. A lot of people suffered. But from that, cash flow wise, you couldn't spend. Everyone's entertainment expenses were down because you couldn't go out.

Yeah, yeah.

And every, every man his dog said, you know what I'm doing? Buy a caravan. That's a great idea. And so they oh, my car can't carry this caravan. I better buy a new car.

Why does he mean when you say that, Scott?

Secondhand cars were going up in value, especially the Prados, the land cruise, the four drives. It's been a crazy world. So rates are going up and they'll go up. And do you know there's 1.2 million Australians who've never experienced a rate rise before.

Wow.

So welcome to the new world. There's a lot of people who've never experienced.

I think it's worth talking about as well, the effect that rate rises have on people that are renting. Like, you know, I mean a person that owns an investment property is going to do everything they can to pass on that increase in cost to their tenants. So we're going to start seeing, you know, rental rates going up as well.

Definitely, yeah. If you're. I mean, I've bought 10 investment pros since 2004, and if you're the guy copping rate rises and you are in a position where you're like, should I just wear it or should I pass it on to my tenant? You're 100% passing it down the line. I'm not left holding a can. I've got my own problems, especially when.

The rental market is so competitive at the moment as well. So.

Yeah, and that's why people started. I mean, that's why the property market took off so much, is because it was actually cheaper for a lot of people to buy a house and pay rent because the rates were so low. And so if you got an average rate of, let's say, 3%, but the average rental yield is 4.5%, that the yield is the actual rental income divided by the property price. And so your yield on your Investment property was 4.5%, but your interest rate was 3% was positive cash flow. So people buying investment pros, but more importantly, renters, like, hang on a second, it's actually cheaper for me to buy a house. I'm just going to go do that. And now it's not going to be cheaper to buy a house. It's going to be cheaper to rent. And so that's when all these renters were spilling into the buyer's market. That's why prices went up, demand was up.

Yeah.

So, yeah, Very interesting.

Yeah. It's going to be crazy, isn't it? I think, like. Like, I wish we could have a crystal ball right now, because if you said to us two years ago everything that would happen in the last two years was going to happen, you'd say, not a chance in hell. Like, what are you talking about? No way. Even during COVID we thought we were going to have the next Great Depression. And then all of a sudden, everything turned around. Demand increase, property prices were growing. Everything was happening, which is just unheard of in the middle of a pandemic. And now we're kind of coming out the other end of it, and it's just no real way of knowing what happens next. All we know is in the next couple of months, rate rises are coming. They've already started. That's going to start to affect property prices. It's going to start to. It's going to flow into Everything, everything's going to change.

That's why the government use it as a lever, because they know you pull the rate lever, the ripple effect of that flows to everyone and everything from businesses, because not just your home loan, that's gone up, your credit, right, credit card rate goes up. Not that you have a credit card because you're a good little cranny, that's a trick question. But your business loan rates go up, everything goes up. Not just home loans, it's all loans, all debt. I mean, the retirees are probably going, I can't wait for these. Because they've got money sitting in cash usually, which means the cash rate goes up for any money sitting in term deposit. So that's one positive.

And quite often when money gets pulled out of the property market, it's put into shares, right? So you can see a return in that area.

No, definitely not. Definitely not. I don't see any growth in my share portfolio. For the one reason is as rates are going up, people like, hang on a second, I get better money by putting better return, putting money in the bank with no risk. And so shares have got risk of downside. So people are like, oh, if the bank's going to pay me more for the return deposit now, I'm just going to take my money off the table and put it safe and sound where I can't lose any. So I don't see too much growth on shares, I don't see too much growth on property, which is sad. Well, where do we put our money? Great question over the next six to 12 months because, yeah, people can't borrow as much, can't get access to much, they need more money for repayments. All these sort of things have a flow on effect. So, yeah, not unfortunately, the glue, the sort of rainbows and skittles that we'd all want to be hearing about. But it's not doom and gloom, it's just we've had a phenomenal run and what goes up must come down. Yeah, and what goes down must come up. But it doesn't matter what happens to your property price unless it's the day you're selling and everyone needs to wake up and say, oh, it doesn't matter if my price goes down by 10% because it went up by 25% last year. So it's irrelevant. All that matters is the property price the day you sell it. So forget about the noise, don't listen to the media, oh, property's going down, it's going to crack. No, irrelevant. If you're happy living where you're living. Great. If you're not happy living where you're living, well, guess what? When you sell your property next year, and you're going to buy another property next year, it's called trading. The property price that you buying has gone down. Plus yours has gone down. It's irrelevant.

Yeah, it's all in the same market, so it doesn't matter.

It's all in the same market.

All right, cool. Enough doom and gloom for one day. Thanks so much, Scott. See you, buddy.

No worries. See you soon. Bye.