Over the past few months, we’ve been hearing more and more about potential interest rate rises.
After a period where interest rates have been sitting at record low levels, there will come a time when the RBA decide to start hiking the cash rate which will have a flow-on effect to the property market. As a buyers agency we know that is going to happen, the question is how do you position yourself to be less impacted than others?
When it comes to buying property both for myself and for clients, I am always heavily focused on blue-chip areas.
These types of locations, such as the North Shore or Eastern Suburbs of Sydney are locations that are in demand for all the great things they have to offer, such as beaches, cafes, restaurants, entertainment and all the great lifestyle and work options that are close at hand.
However, the big thing to note about these types of areas is that they are very affluent. The people living in these areas are typically wealthy. I like to buy into areas that are surrounded by affluence because not only will those areas outperform in the long run, they will also likely be less prone to corrections when markets soften.
The difference between the wealthiest areas and the rest of the country is quite stark when you look at the figures.
The average Australian household has a net wealth of $1,022,200, households in the highest quintile have an average net wealth of more than three times this ($3,236,800).
Households in the lowest quintile, however, are worth just a fraction of the average (3% of the average wealth, or $35,200). The lowest 20% own just 1% of the national private wealth while the highest 20% own 63% of the national private wealth. The wealthiest 20% own 80 times that of the lowest 20%.
Let’s look at this discrepancy when it comes to buying property in a rising interest rate environment.
While we’ve heard a lot in recent years about buying positively geared properties in regional areas, the reality is that the people living in many of these locations, where house prices are normally well under $500,000 don’t have a lot of space capacity with their weekly earnings.
Typically, it’s owner-occupiers who drive up house prices. For people living in locations with low average earnings, there comes a point, when house prices rises will have to slow because the people living there simply cannot continue to pay higher prices. If you add in a rate rise of 1-2 per cent, then that’s going to dent the ability to borrow for a lot of people.
Contrast that to more wealthy locations, where the demographic is made up of business owners and highly paid professionals. These people are far less impacted by small changes in interest rates. While business owners are certainly not immune to the economic cycle, they are generally in a far better position to deal with small interest rate rises.
As interest rates do eventually begin to rise, it’s important to make sure your property portfolio is set up to weather the storm. A great way to do that is to build it with a focus on blue-chip properties in locations that have a record of strong growth over a long period of time, throughout many different market cycles.