Property’s Lucky 7, Or Should That Be Lucky 5?

We all know that interest rates have been dropping over the last couple of years. In July of 2011 they were 7.00%. Now they sit at 5.00%. Plus the numbers that go hand in hand with these rates (yields or amount of rent) have moved from around 5% to closer to 7%.

The significance of these numbers is that since the early 1990’s a 7% interest rate has seen increased property activity and a resultant increase in values. Over the same time period, when yields hit 5% we also saw increased property activity.

But it didn’t happen this time. So is the new trigger 5% interest rates and 7% yields? Well not exactly but very close. RPData tells us that property prices have already increased by 8.8% in Sydney since the trough. In fact, right across the country, capital city prices have jumped between 1.1% and 13.1%. The movement actually started when the interest rates hit 5.6%. Yields at the time were hovering around 6%.

The fact that rental yields are above the interest rate is significant for investors and tenants alike. For investors it’s likely to mean positive cash flow and imminent value increases. While for tenants that ‘dead money’ that goes to rent can be directed toward the Australian Dream. RPData released a report in July, before the last interest rate fall, that showed the number of suburbs in Australia where it’s cheaper to buy than rent. At that stage 1,024 suburbs were identified as cheaper to buy than rent. Since the last rate drop that’s likely to have jumped significantly – I reckon over 2,500.

The wash up of all these numbers is that history tells us there will be more activity and price increases to come. That’s because for home owners loans are easier to pay back, for investors they will see positive cash flow as well as increased prices and for tenants it’s more likely to be cheaper to buy a house than rent (for a while anyway). That’s lots of increased demand. So prices should go up.

The thing to watch out for, as always, is to be aware of the market you’re dealing in. That spread of price increases I mentioned above (between 1.1% and 13.1%) makes a huge difference if you’re on one end or the other.

So do plenty of homework, and get the right support team, to make sure your property results don’t just rely on luck.

[googlefont font=”Shadows Into Light” size=”36px” margin=”20px 0 0px 0″]M. Scott[/googlefont]

Mark Scott

Mark Scott is Director and Senior Consultant of JSA Property.  Mark joined JSA in 2013 bringing with him 25 years of property investing experience. He successfully ran his own licensed property advising business for 10 years before joining the JSA group.