Property investment in a low interest environment

x_157_87603_0_14100315_300Australia’s current low interest rate environment is the talk of the national property industry. Its record low interest rates have been credited with everything from boosting housing affordability to spurring on high levels of home construction, as buyers rush to scoop up cheaper construction loans. In fact, just this month (October 7), the Housing Industry Association Senior Economist Shane Garrett declared: “Low interest rates have been important in delivering higher rates of new home building.”

While low interest rates are no doubt good for buyers Рproviding lower repayment rates on mortgages and helping increase the level of housing stock Рare they as beneficial for investors? And what are the unique challenges of investing in such an environment?

Interest rates benefit property investors, too

There’s no doubt that, as a type of property buyer themselves, investors can also benefit from the lower interest rates on home loan products. For one, it means they themselves can secure investment finance for cheaper. Not only that, but with a larger amount of buyers in the market, all looking to obtain loans, lenders are forced to be more competitive in order to get a share of the market, by offering more attractive loan options.

Finally, the greater number of home buyers looking for real estate, which low interest rates tend to encourage, mean more competition for housing – something that tends to drive up sale prices.

Reserve Bank’s words of wisdom

Nonetheless, there are certain facts that budding property investors have to be aware of in the current market. The Reserve Bank of Australia (RBA) Deputy Governor Philip Lowe recently gave his thoughts on the issue of property investment in a world awash in low interest rates, doling out important advice for those thinking of purchasing property.

Addressing Commonwealth Bank’s Seventh Annual Australasian Fixed Income Conference, Mr Lowe pointed out that the housing market was currently working as it should in a low interest rate environment: That low rates had encouraged investors to purchase property, raising prices, which influenced investors to invest their money in future assets rather than leaving it in banks. This then translated into a growing demand for housing construction.

“So this part of the monetary transmission mechanism is working in Australia, and working more effectively than it is in some other countries,” ¬†he told the audience on October 21.

“The higher construction activity is adding to jobs and assisting with the rebalancing of demand in the economy as mining investment declines.”

Nonetheless, he cautioned investors that being aware of risk would be crucial for successful investment in such a market.

“[I]nvestors need to evaluate developments in the broader market, including how their investments might turn out in less benign scenarios,” he continued.

With record low interest rates likely to be with us for some time yet, this advice will be good for real estate investors to keep in mind over the months ahead.

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