An Intimate Real Estate Conversation: Episode 3, Interest Rates
Two of Australia’s top Real Estate people discuss issues relating to the WA Property Market. Watch Episode 3: Interest Rates.
Intimate Real Estate Conversations between Adrian Abel, CEO of Abel Property and Ross Hunter, CEO of One Degree Consulting.
RH: Hi Folks, back here with our intimate conversations with none other than Mr Adrian Abel from Abel property group. Adrian we’ve spoken about a lot of topics. Today, about that sort of ongoing discussion about interest rates and money and what does that do for us, how does it get us into the market, how do people afford it when it goes up and all those sort of vexing questions around interest rates. What’s going on in that world mate?
AA: Interesting space, thank you Ross. Pardon the pun on the interest rate, what I’ve found is when interest rates started to drop. Probably 7 years ago or after the GFC it really made a big difference to the market. People went woo I can afford a bit more therefore they went and spent a bit more. It was quite positive in price aspirations, then it got to a point where people saw interest rate drops as a harbinger of doom. And they went “man interest rates are dropping therefore the economy must be struggling, therefore I’m not going to spend any more money”. And I think people in the last 5 years have been in this momentum of prosperity and concern so nowadays a low interest rate is a standard. My concern is that we have a whole population and generation of homebuyers over the last 8 years since the GFC, who only know sub four percent interest rates.
RH: Yeah I remember I bought my first property. I thought I got a great deal at 17.5% and I was over the moon!
AA: That’s right.
RH: You know so..
AA: And when I came to Australia they were at 9% and then they started to move down and eventually 5 or 6%. But my concern moving forward the economic barometers are suggesting that we will start to see an interest rate possibly in the New Year, 1 maybe 2 before the end of 2018. People borrow to the maximum, they’ve taken maximum LVR’s at an interest rate of 3 or 4%. When that interest rate gets to 4 or 5% I’m not sure that they factored in the capacity and that may have a very strong negative impact on the market.
RH: Yeah no it’s like you’re talking about the loan value rate ratios and so forth its interesting, over in Auckland which has been a very, very strong market and there’s been a lot of foreign investment to try and break and put a bit of a break on the market they’ve moved the LVR to 40%.
RH: So 60 40 ratio so you need to have 40% equity to be able to buy a property. So you know these things can become a real issue to everyday investors or home owners.
AA: We sell a lot of property up in the Ellenbrook and Aveley type areas which is a lot of FIFO where people were buying at 90% LVR’s the markets moved back by about 20% we’re talking negative equity. We’ve got to be careful.
RH: Well we do. And really drives home an important point, no matter what the LVR’s are and no matter what people have done to get into a property it’s so important that we do as much as we can in the low interest rate market to reduce debt. Too many people sort of use the low interest rate to sort of cash flow other areas of life. The greatest investment somebody can make…
AA: Pay of their debt.
RH: Pay down as much of the debt as possible in the low interest rate environment that way they’re making sure that if things do go up they’re actually ok. I read an interesting stat – the average Australian has one month’s worth of mortgage payments in front. They’ve got 4 weeks grace you know the only way we can improve that is making sure we just get you know go without something sacrifice something. But get into that debt and pay it down.
AA: That is not the philosophy of the current generation Ross.
RH: NO! No, they want us to die quick so they can get our inheritance.
AA: That’s the post second world war generation.
RH: (laughing) yeah, yeah yeah.
AA: So in summary the idea is if you can factor in a repayment plan that is based on about I would say 6 or 7 per cent interest rate and you get ahead then you have nothing to fear when it comes in and the interest rate starts moving up over the next couple of years. And you’ll find that a) you pay down your mortgage a lot faster but b) your equity grows. Ross thanks again for a great chat.
RH: Thanks Adrian, thanks folks. See you next time!