The Reserve Bank of Australia (RBA) made its cash rate call on Tuesday, and while there were no surprises in the rate being held at 0.1%, many across the industry are now seeing interest rate rises in 2022 as an inevitability.
The effect of interest rate rises on property investors could go multiple ways. Higher interest rates, allied to continually rising house prices and tighter lending conditions, could improve the position of investors against first home buyers, particularly in regional areas.
On the other hand, property investors pay higher interest rates than owner-occupiers, meaning that any hike in rates hits them harder. On top of that, investors may have multiple properties and thus multiple home loans, which can compound if repayments go up.
Arjun Paliwal (pictured), of property investor data experts InvestorKit, told Australian Broker that investors in NSW, in particular, were less likely to feel the immediate impact than first home buyers or renters.
Read more: Median capital city house price passes $1m as boom continues apace
“Cash rate rises will have some sentimental impact for investors as this will affect the way they feel about potential returns,” he said.
“In NSW, rents are typically lower yielding so the impact on them is slightly higher as the cash rate moves.
“In saying that, I think we’ll see rents rise quickly as vacancy rates have been suppressed. Overall, I don’t think a cash rate rise will have a massive impact on current owners – more for those considering becoming an investor.
“A cash rate rise will have a lower impact on regional areas as many are undervalued and more affordable than they are overvalued, even if interest rates were to rise 1%.
“Investment opportunities in lower regional areas will still remain should the cash rate rise as the rental markets have experienced more stress.
“On the other hand, coastal areas will look skewed as the majority are overvalued and unaffordable and a lot of the money is coming from across the country.”
Property investors are just as susceptible to interest rate rises as any other type of lender, said Paliwal.
“There will be a knock-on effect on people’s ability to borrow as borrowing power is calculated based on the interest rate on top of a borrower’s buffer rate,” he explained.
“Therefore, borrowing capacity will be slightly weaker. In saying that, rising interest rates aren’t the only stress test on repayments, alone.
“This analysis doesn’t look at a household’s savings which will also add a cushion. The overall thought here is that with varying over/under value assessment across regions, different locations will have varying impacts.
“Owner occupiers naturally may tighten the household spending a little, first home buyers will be impacted by rising rents so they will still do their best to enter the market with the headwinds.
“Overall, the impact should not be large and widespread due to the improving economy, household budgets and rising rents to bring relativity.”