Latest report reveals lower interest rates for longer
According to the latest Australian Real Estate Quarterly Review from Dexus, interest rates and inflation could stay ‘lower for longer’ which could have profound implications for real estate investment, with investors reducing the level of returns they expect.
Currently, interest rates in Australia are at record lows, sitting at 1.75 per cent. The recent events of Brexit, a slowing Chinese economy and downgrades to global growth forecast by the International Monetary Fund could cause the official cash rate to fall even further. In spite of this, Brexit is assumed to have little economic impact on Australia, with effects more likely to be geopolitical. A fall in interest rates could be helped by declining trade and a slowdown in housing construction.
In terms of inflation, this is set to remain low helped by weak wages growth and spare capacity in the economy. Employment growth is positive, but the rate of growth is slowing with a continued shift from full time to more part time jobs.
For property, the lower interest rate environment will help support investment demand for real estate in the short term as investors seek secure income yields. Lower interest rates are also popular with owner occupiers who are looking to take advantage of lower mortgage repayments. However, both investors and owner occupiers need to be mindful that interest rates are likely to rise in the future, so it is important to ensure you purchase a property that sits comfortably within your budget.
The report states, “Expected returns for real estate investments are likely to be lower than the experience of the past decade. This continues a long-running trend. For example, valuation discount rates have stepped down by more than one percent each decade for the past 30 years, and it is now happening again.”
With a lower interest rate environment, then rental growth outlook for real estate investments will also be lower to match the slower growth economy. Therefore, property investors should budget accordingly and not stretch themselves too far in case interest rates do take a sharp rise. They should also expect lower returns and adopt a more conservative approach.
However, property continues to perform well with real estate providing sold returns, even though expectations are more moderate this year. A-REITs and unlisted property delivered total returns over the past year of 24.6% and 13.4% respectively.
As 2017 approaches, both low interest yields and global uncertainty are supporting investor demand for real estate. The report assumes that NSW and Victoria will both solidly outperform other states based on population growth and infrastructure spending. However, QLD is forecast to improve in 2017, helped by its more affordable property when compared to Sydney and Melbourne whilst WA will fall behind as mining slows down and people start to look elsewhere to live and to work.
The report also expects the official cash rate to fall even lower in 2017, with falls of 25 to 50 basis points predicted, making this an opportune time to get your foot on the property ladder if you haven’t already done so this year.
Published on 26th of July 2016 by Marty Stanowich