There’s a widespread assumption that low interest rates make housing more affordable. Rate-cuts also tend to raise people’s confidence in buying an investment property.
But these approaches can be overly simplistic. Rate-cuts make mortgages more affordable, but they can also boost buyer-competition, placing pressure on house prices.
Conversely, when there’s an interest-rate rise, we usually see a ceiling on house prices because money is no longer as affordable.
At the moment, interest rates are at a record-low, and housing prices remain strong. These developments impact on rental yields in some markets, and some investors are now willing to accept much lower yields.
But we tend to buy within the markets where rental yields remain relatively robust. For example, we favour properties in pre-gentrified areas where students like to rent. In these locations, investors are continuing to enjoy strong rental returns, despite the lower interest rates.
Meanwhile, the houses in these areas are also experiencing healthy capital appreciation, fulfilling the need for long-term wealth creation.
A residential property’s performance during interest-rate fluxes depends on the stability of the property-market you’ve bought into. Regardless of interest rates, the trick is to buy well in locations underwritten by factors such as sound infrastructure and favourable demographics – factors that are more resistant to fickle and unpredictable events.
Until next week,