The RBA’s announcement today saw the cash rate drop to a historical low of 1.25%. Add (subtract?!) to that, many economists are tipping another cut, which does tend to be the RBA’s norm (the previous rate cuts being May & August 2016, February & May 2015, May & August 2013, October & December 2012…).
Some economists are even tipping a floor as low as 0.50%, being a full 1.0% cut inclusive of today’s.
The important questions on the minds of borrowers and those in business & the property industry now should be:
- What’s in store for borrowing rates?
- What opportunity does this create?
Now there’s of course a decent degree of crystal-ball gazing that goes on for anyone that tries to answer these questions – seasoned professional economists included (whom I often liken to weather forecasters, as far as their forecasting accuracy goes!!) – but today’s RBA decision combined with a number of other factors does make for some interesting times ahead to ponder.
Will we actually see 2.5% interest rates?!
Sounds crazy right? It might sound a little crazy, but it’s very much possible; here’s a few really simple numbers:
3.5% to 4.5% – the current/recent interest rate range for most home & commercial property loans
minus 0.5% – likely RBA drops in the next few months, including today’s cut
minus 0.5% – BBSY is already down this much in the last few months, pricing in RBA cuts, 3 year swap rates are sitting at about the same, which should mean there’s still room for more.
= 2.5% to 3.5% borrowing rates are totally plausible during the next few months
The question is how much of the RBA cuts and BBSY that the banks actually pass on. We can probably all expect that they’ll hold back, but pressure should build on them to pass cuts on, particularly noting the movements in BBSY & longer-term swap rates.
What about the Australian Economy?
Well, in our humble opinion, there’s a mix of some headwinds & tailwinds…
RBA Cash Rate
- Cut today and likely at least another to come, should increase consumer & business confidence and inject more money into the economy; but…
- The fundamental reason the RBA cuts rates is not because they’re a bunch of good blokes, it’s because the economy is performing worse than they want it to.
Unemployment & Wages Growth
- The surprise Federal Election result has already driven improvements in consumer & business confidence, as well as the stock market;
- Standing by for proposed tax cuts & infrastructure spend, which should drive good levels of spending & growth;but…
- This has been a challenge, particularly in Qld & WA. These need to pick up for us to see any real improvement in the economy.
Construction & Property Market
- Election again – fears of negative gearing are gone, which combined with low interest rates will hopefully bring property investors back to the market, thereby boosting construction;but…
- Home lending is still tight, Sydney & Melbourne’s markets are still declining (hopefully nearing the bottom), construction costs are still high.
Home Loan Market Credit Tightening
- APRA has just advised the banks that they’ll likely be allowed to loosen off from the 7.25% interest rate they must assess home loan servicing on, likely to the higher of about 6.5% or 2.5% above prevailing rates;but…
- Banks are currently too scared to ease back on controlling risk. So fingers crossed that the banks actually loosen this off (recently when APRA let go of the 30% limit on interest-only home loans, the banks ignored that and continued with the tighter policies).
Opportunities for Property Developers & Investors
With debt rates heading as low as they probably will, some great opportunities should present to property developers and commercial property investors.
A $400,000 loan at a 3% rate, P&I over 30 years = only $389 per week (and that’s paying it off!)
For first home buyers, that’s probably less than the rent they would be paying on an equivalent dwelling. Add to this:
- The First Home Buyers Grant is still in existence for new dwellings; AND
- There are home lenders providing loans with 95% LVRs to owner-occupiers; AND
- Promises of the LNP Government’s “First Home Loan Deposit Scheme” providing further potential support.
Developers – if your product’s price-point is in first home buyer territory, get out there and market these factors hard.
First home buyers are an increasing market segment and will likely continue to be so with the above tailwinds, so the opportunity is there.
(The caveat to this is that, given banks have to assess home loans at a rate more than double that, they need to be able to evidence the ability to afford repayments about double that)
For investors, it brings down any negative cashflow, potentially even bringing a standard dwelling into a positive cashflow situation.
Commercial & Industrial Owner-Occupied:
Is your business paying rent? Given commercial & industrial properties are still often yielding 5.5% to 8% (some even higher, some lower, depending on numerous factors affecting property values), check out these numbers for an opportunity:
- Let’s assume the market yield for the properties you’re renting – and would buy – is a net yield of 6.0%.
- If you’re paying $10,000 a month in rent plus outgoings, that property would be worth $2,000,000.
- You have equity available of 35%* = $700,000, plus purchase costs = loan of $1,300,000
- If you applied the $10,000/month you’re currently paying in rent, to repayments on a $1.3m loan with a 3.5% interest rate, you would pay off the loan entirely in about 13 ½ years.
- If you happen to be suited to a property with a market yield of 8%, rent of $10k/mth equates to a $1.5m property value, 35% is $525k, and a loan of $975k at $10k/mth repayments drops to an incredible 9 ½ years to repay in full!
- Then, no more rent. Or some great stable income & an unencumbered asset for your retirement.
* Note that there ARE options for less than 35% equity with commercial property loans – so if you would like to buy but don’t have 35% + costs, do give us a call to discuss your circumstances.
Commercial & Industrial Developers & Investors:
Quite frankly, the same argument as above applies. The spread between debt rates and market yields provides the opportunity to:
- Pay off the loan in entirety within a bank’s standard 15 year P&I term (i.e. why bother with asking for interest only, just let the debt pay itself off!); or
- Build up cash rapidly from net passing rent, to re-invest.
Record low rates have made it the time to Unlock Opportunities.
Whether you’re looking to develop, or buy & invest – or even just get a better rate on your current loans, get in touch with us and let’s discuss how STAC can help you Unlock Opportunities.