The 'Pain and Gain' of record low interest rates!
The 'Pain & Gain' of record low interest rates!
"Residential property is the only safe investment offering a decent return!"
When I overheard one of Australia's most senior corporate executives make this bold comment earlier this week I stopped and took the time to consider a few very obvious truths about our current investment choices.
This week the official cash rate was slashed again to a new record low of just 0.5%. Whilst property investors like me quietly celebrate the massive advantages this provides to building our property portfolios, the stock markets continue to crash, business confidence continue to scare commercial real estate investors, and anyone holding cash currently finds themselves not much better off putting their savings in the bank than stuffing their couch.
This latest RBA interest rate cut is expected to force even more Australians to have little choice but to invest in the residential property market. Retirees are now faced with the reality that their cash savings are only going to pay them a return of around 1%. Imagine how disappointing it must feel to have worked hard and saved for retirement, proudly becoming one of the few retirees with a nice big cash nest egg, only to find yourself receiving almost no financial benefit.
Most retirees remember very well when interest rates were in the double figures and could never have possibly imagined a time where interest rates were so low. Most would have planned to have seen at least a 5% return on their savings and with every month that interest rates stay low, the disappointment grows for these investors.
Conversations are now turning to residential property being the only investment choice with an appropriate risk profile, that can meet the income expectations of many investors. Unfortunately most will struggle to enter this asset class if lending is required, but many of the higher net wealth investors are already securing residential property at a growing pace.
Comments like "Property Investing is becoming sexy again" are now appearing in publications read by millions of Australian retirees. Fresh figures from the Reserve Bank show that whilst owner occupier housing loan debt is falling, investment debt has surged 12% in the last year as investors regain a passion for the reliable cash flow offered by residential property. Whilst the 'safe as houses' mindset is not coming as a huge surprise to most analysts, the forecasts around what locations investors will be targeting is considered a very interesting new trend.
Regional markets are expected to be the big winners in the rush to secure income producing property. With the Sydney and Melbourne property markets offering investors half the rental yields at twice the purchase price, it's no surprise for informed investors that the flow of buyer demand is expected to be felt more in the best quality Regional Hubs that have emerged in recent years as secondary cities. Many of these growth markets offer a unique combination of housing affordability and strong rental yields.
While the Domain Rental Report in December 2019 highlighted that rents continued to fall and vacancy rates had increased to favour the tenants in most regions of Sydney, rental yields continued to rise in many key Regional Hubs thanks to strong population and job growth driving a constant rise in rental demand. Property commentators are quickly realising that investors in Australia's two biggest cities are fast realising they are getting the lowest yields in the nation and this doesn't look like changing anytime soon, in fact in many cases rents have fallen to levels not seen since 2015. Great news for renters, but disheartening for Landlords.