Why the rate cut is meaningless for long-term property investors
Thursday, October 4, 2012/
The interest rate gift from the RBA this week, its fifth cut in the past 12 months, will be a further catalyst for property markets already moving steadily into recovery.
The only time in the past 20 years the official rate has been lower than it is now was in 2009, following multiple cuts in response to GFC-related issues.
It’s clear from the messages I get from real estate consumers that intending buyers await RBA deliberations before making decisions.
But, if they were thinking clearly, the monthly interest rates moves from Glenn Stevens and his colleagues would be irrelevant.
No one with a cogent long-term investment strategy would be swayed by short-term trends in interest rates. Buying a property means, for most people, taking on a mortgage commitment stretching decades into the future. During the life of the loan, there will be multiple rate cycles. This month’s RBA decision is essentially meaningless.
In the past 20 years we’ve had 51 changes to the official cash rate – 24 reductions and 27 increases. The increases tend to be in smaller increments than the cuts, so the net effect is that rates are today considerably lower than they were two decades ago.
The key point is that there have been four peaks and five troughs (including the current one) since the early 1990s. At a couple of points in that cycle (in 1996 and in 2008), the cash rate has been about 4 percentage points higher than the current level.
The next 20 years is unlikely to be much different.
In the light of that information, nervous investors who sit on their hands awaiting the next RBA decision, while reading the breathless daily speculation by economists in the weeks preceding the monthly board meetings, are demonstrating a losing of the plot.
The issue that should be focusing their minds is this: if I buy a property and take on a mortgage, at some point during of the life of my mortgage rates will be higher than they are now. Will I be able to cope if rates are 2 percentage points higher than now? How about if they go 3 percentage points higher?
If I’ve done my sums and concluded I can deal with the inevitable fluctuations along the way, then my decision should not influenced by RBA moves last month, this month or next month, nor the relentless pointless and usually inaccurate speculation on future movements by the endlessly chattering economists (most predicted the RBA would not cut rates this week and expressed their usual surprise when they discovered they’d got it wrong yet again).
The current low levels are little more than a short-term bonus.
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