This month the Reserve Bank of Australia (RBA) decided to cut the official cash rate to an historic low of 2.25 per cent, and with banks willing to pass these savings on, current Perth property owners have plenty of reasons to rejoice.
Not since the 1970s has Australia’s cash rate been so low. The last time a home loan was below 5% (which is where it will fall to with a cash rate of 2.25%) was over 30 years ago – it has been a long time since Australians have been able to access money so cheaply!
Peard Real Estate CEO, Peter Peard, explains how record low interest rates have opened up a window of opportunity for current property owners.
“Over the past year, the gap between higher and lower priced properties has narrowed due to continued strength in the lower to mid-range of the property market.”
Mr Peard proposes that success in real estate comes down to timing, and right now, the market is ideal for property upgraders.
“Home owners should be making the most of Perth’s current real estate market and low interest rates, to invest in an area that will see strong capital growth in the long term”, says Mr Peard.
Take inland suburbs such as Alexander Heights for example; with a median house price of $510,000, have experienced price jumps of 11.3 per cent, while prices in the coastal suburb of Kallaroo have fallen by 7 per cent during the same period.
As money becomes cheaper, property investors too are more interested in investing in the market, using the depreciation benefits to their advantage. We can definitely expect to see more investors snapping up properties that most commonly are reserved for first home buyers. Investors are likely to bank on capital appreciation and can afford the off-set from the loss.
This, of course, will have a back lash on first home buyers, making it even tougher for them to enter the market. As more investors are interested in the same traditional first homes as first time buyers, competition will be high. Two bedroom homes in prime locations will become tougher to buy and anything that is a corner block with redevelopment potential is almost certain to be purchased by an investor, making things increasingly difficult for first time buyers.
So you might ask – why is the RBA choosing to lower the cash rate now? And why so drastically low?
In a nutshell, lower interest rates make it much cheaper to borrow which encourages spending and investment.
With interest rates lowering, consumers have reduced incentive to save as smaller returns are made. Instead, they are encouraged to spend, and putting money back into the economy. This helps to build consumer confidence in the market.
Since the beginning of rate cuts spending has been minimal, and it is believed that the RBA will continue to push interest rates down to further encourage spending on goods and services.
If consumer spending begins to pick up, so too will the economy. This will help us to see more jobs become available, helping to keep unemployment stable or even lower it.