Will interest rates go up in 2022?

By PK Gupta
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Photo by R ARCHITECTURE on Unsplash

Although the exact timing is still uncertain, several contributing factors indicate interest rates will not go up anytime soon

PK Gupta

Are interest rates rising and will that mean that residential property prices in Australia will start falling. I don’t have a crystal ball, but I have significant observations on whether interest rates will increase and impact the property market. I will give you an objective understanding of these observations so you can be more informed and make a better decision to secure your financial future.

1] It’s not an outdated fact that property prices reduce when interest rates go up. However, there have been instances in the past, even in the last decade, when interest rates went up but property prices didn’t fall. For example, in 2011 and 2012, there was a lot of pressure on the Australian economy to hike the interest rates, and they did rise, but the property prices didn’t fall. It’s because many property markets were booming or starting their boom cycles. So looking at history, the conclusion is that just because the interest rates rise doesn’t mean property prices will go down.

2] If you go to the Reserve Bank of Australia website, you will see a fantastic thesis from late last year that shows that even though mortgages and debt were higher than in the previous year, people’s affordability was higher too. In other words, there was a record number of households in Australia where they were in advance of their mortgage payments, sometimes by 18 months. The families had so much cash on their balance sheet that even if interest rates went up or they lost their jobs, they could still hold their properties. RBA demonstrated this by looking at the funds under management in offset accounts, savings accounts, and liquid assets. These funds, sitting idle, could be sold in emergencies. So it is not that if interest rates go up and suddenly people have to fire sale their properties.

3] According to Australian Bureau Statistics, six hundred thousand jobs were created across all industries in Australia in the last quarter. So, there is no doubt that employment is increasing. However, the fact remains that there is significant underemployment in the Australian economy. Underemployment means if people are working for an hour a week, they are technically categorized as gainfully employed, but in reality, they are not. They could be doing much more work and are not utilizing their skill set enough, so they are underemployed. And underemployment is massively increasing in Australia. People are not seeking employment. If you are not employed and not looking for a job, you are not classified as unemployed in the statistics.

Roy Morgan, the leading customer sentiment and survey agency in Australia, reports that the unemployment rate in Australia stands at 8%. In contrast, the Australian Bureau of Statistics says the current unemployment rate is 4%. So, in reality, the employment rate is much higher, and apparently, the economy isn’t as strong as reported to be. That is one of the reasons RBA doesn’t want to jump the gun and prematurely increase the interest rates only for unemployment to increase in real terms.

4] Undoubtedly, inflation is rising, but it is still only 2.25% on an underlying basis. So, the RBA’s target or inflation barrier is still on the lower end. Though the RBA does want to nip it in the bud before it goes beyond 3%, but it’s a fact that it’s still on the lower end, and there is no great rush.

5] One of the significant factors for inflation is rising fuel costs. And the reason the fuel costs are going up is because of the temporary bottlenecks in supply chains due to the war and pandemic. So while the demand is still the same, the supply is reduced, giving rise to prices. Now, these bottlenecks are transient and will not go on forever. Sooner or later, these structural bottlenecks will dissipate, and the supply will resume. So currently, the RBA doesn’t want to increase the interest rates prematurely, only to find that the inflation has come down on its own in six months or a year. Because if RBA does that, it will be stuck with a deflating economy.

6] Another reason the interest rates will not go up any time soon is that the elections are around the corner. Even if they do, it’s probably going to be a one or two per cent rise. But it is highly unlikely because there is not enough data for the government to take a punt against the Australian economy.

7] As long as rents are rising, investors will be fine. And the good part is in all the good suburbs of Australia, not just Sydney or Melbourne anymore; rents are rising. In fact, rents are significantly increasing in secondary capital cities and regional areas. These are positive cash flow locations with a tight vacancy rate. So, even if the interest rates go up, remember that the rents are rising faster than the impact of interest rates growing. Also, in about six to 12 months, hopefully, immigrants will start to come. Immigrants put a lot of upward pressure on rents because they don’t buy property when they arrive; they look for rental properties.

8] The science of property investing has never been to put a blindfold on, take a dart and throw it at the dartboard. The science of buying properties has always been in finding markets within markets where it makes sense to buy. In all probability, interest rates will increase this year or next year. Currently, they are at record lows, so that is definitely going to happen. But if the interest rate goes up too soon and too quickly, the markets that will see the most downward pressure will be those owner-occupiers who have overextended themselves and really pushed their household finances to buy properties. You will not see this in all areas of Australia, but mainly in certain parts of Western Sydney and Melbourne, where people have overextended themselves. The prices may not necessarily fall that much in these areas, but suddenly, owners will find that their mortgage repayments have increased. And that is the situation you want to be steering clear of.

9] In December 2021, consumer confidence was the lowest since September 2020. So was the business confidence. In such a scenario, the RBA is being very careful. It doesn’t want to rub salts in the wounds of business owners and consumers by increasing interest rates. The last thing they want is to create a recession. The role of RBA is not to mitigate house prices but to make sure that the economy is buoyant.

10] Australia’s economy rests upon real estate. That’s where the majority of everyone’s wealth is. The RBA does not want to kill the Australian economy by increasing interest rates too fast and too soon, so people start selling their houses. That’s not what the RBA wants. It will not rob the economy to slow down the housing market.

Often people think that the RBA wants to bring down house prices by increasing interest rates. That’s not true. The reality is that the government has so much debt that the faster the interest rates go up, the more debt the government will need to repay. In other words, the more interest that will capitalize, it will need to be compensated by the government through the owners of government bonds. So by increasing the interest rates, RBA doesn’t want to shoot themselves in the foot.

11] Unlike in the past two years, now is the time to invest wisely. The cream will rise to the top in the second half of 2022 or 2023. The smartest investors will significantly outperform everyone else because there will be more disparity in the performance of different markets around Australia.

It is imperative to follow the data, to be more clinical in choosing the right location and selecting the right asset. Earlier, even if you were naive about the property market or didn’t follow data and trends, you would not lose money in the housing market. But the time has changed. It is the right time to outperform in the Australian property market. Whereas an average person may make 10% capital growth this year, a sophisticated investor can achieve 20 to 40 per cent capital growth.

Now is the time when the best markets, the best suburbs and the best locations within suburbs are going to shine. However, it’s not a case of a rising tide that lifts all boats. So it is not the suburbs of Sydney or Melbourne that will shine. It will be the places like Adelaide, Perth and parts of regional Australia. These are the areas where owner-occupiers will not need to sell. They will be least affected by the increased interest rate because of their affordability. So you will see a different narrative than in Sydney and parts of Melbourne. The Australian market is not one property market but markets within markets. So you have to start distinguishing the markets and make the right decision.

12] As the old saying goes, the best time to buy property was ten years ago, and the next best time is to buy now. It can be the best time to buy today if you know where and how to invest. If you don’t know and you are taking a gamble or listening to your friends or colleagues, then that is where the risk lies. That’s why I always say get educated on the market. Education is the golden key that can get you ahead from a passive income, wealth, and capital growth perspective.

If you invest in the right suburbs and markets within markets, you will not be affected even if the interest rates go up sooner than expected. You can outperform the average market over the next five to 10 years by creating the right strategy. To do this, you don’t need a buyer’s agent. Get educated on the property market, and you can do it yourself.


The author is a Brisbane-based property investor and a famous YouTuber. Through his videos, he shares his knowledge on how to grow wealth and passive income through property investing. For more, visit consultingbypk.com.au

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