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History has shown that when interest rates rise, so too does property value
Many people “believe” that property prices fall as interest rates increase. This belief is at times warranted due to the emotion that property should drop when interest rates increase, coupled with a very short term drop in auction clearance rates.
We look at the basic reason why interest rates are increased by the Reserve Bank of Australia (RBA) and overlay this with business self-assurance and past property price performances, we come to a very different conclusion.
Why does the RBA raise the cash rate? Increased expenditure is the answer. This increased spending is not only from business, but from the mums and dads spending more on holidays, clothes, car, whitegoods and renovations.
Inflation starts to kick in when the financial system picks up. Inflation means increases in the price of goods, services and assets. Yes, your clothing will cost more to buy, that hair cut will cost more next month, the holiday will cost more than last year’s, your shares will increase in value and the biggest asset that most Australians rely on for wealth (their home) increases in value.
When interest rates amplify, property prices typically don’t fall. As we saw towards the end of last year, property prices had already begun an upward climb before the interest rates started increasing. When the RBA says there are more increases to come, what do you think astute investors are doing? Ask to top 1% of wealthy retirees what they did many years ago … They bought and held residential property!
The last chance to make good assets growth through suburban property for the aging baby boomers and the start of a possessions love affair for Gen X and Y is within the next 8 to 10 years to come.
In the mid 70’s, late 80’s and early 2000’s when interest rates started to increase and entered double digit figures, evaluate what was happening with property prices at the same time, you will notice that interest rate hikes coincided with residential home prices going through the roof.
Will the past repeat itself? Only the upcoming will tell.
Peter Morris
"Making Property Investing Easy!"
S.E.QLD. Investment Property
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