How to invest in property when money is no longer “free”

How to invest in property when money is no longer “free”

  17 Jan 2024

Over the years from 2009 to 2021, the property investment landscape was richly nurtured by the rains of a low-interest-rate environment.

But things are very different now!

If you look back to 2008 and the Global Financial Crisis, you will find it was swiftly followed by a significant property boom as well as a mining boom that led to a flourishing Australian economy with capital flooding into the market like a river after rain.

This period was characterised by an optimistic atmosphere, a booming population, and easily accessible and inexpensive credit with falling interest rates and consistently soaring asset prices.

And over time interest rates slowly fell.

Then to add fuel to the fire, the RBA’s interventions during the Covid era dropped interest rates to “wartime levels” – virtually zero – and painted a picture of virtually ‘free’ money.

This of course fuelled the once-in-a-generation property boom we experienced in 2020-21 however, as all things in nature and the economy, seasons change.

The RBA’s monetary policies also catalysed a surge in inflation, which was initially predicted to be a temporary blip, but which has stubbornly persisted much longer than many anticipated.

Now the cure indeed seemed to be worse than the disease, forcing the RBA to tackle inflation by raising interest rates 12 times in as many months.

And as the rates rose, the era of ‘free money’ faded into the annals of recent history.

Sure inflation is in retreat now, but interest rates are expected to remain above their long-term average for a while.

And this shift demands that property investors adjust their strategies in the new financial era.

Strategy

Be sure you have the right strategy

Staring at this altered landscape, property investors have no choice but to switch gears.

Low interest rates which could paper over the cracks of poor investment choices or bad financial habits, are no more.

Just look back to the property boom of 2020 – 21 when low-interest rates and almost “free money” led to almost every property, even secondary properties, increasing in value strongly.

It made even the most inexperienced investor look like a property genius.

Now moving forward in this higher interest rate environment our property markets will be fragmented meaning there will be winners and losers.

Currently, each state is at a different stage of its own property cycle, and within each state, the submarkets are fragmented as each segment is affected differently by interest rates, the cost of living, and our economic challenges.

For example, the more affluent suburbs in Sydney, which led the downturn of 2022, this year lead the market upturn.

Of course, it makes sense that the more affluent population in these suburbs is not being hurt as much by rising mortgage costs, rising rents, and the rising cost of living in the less affluent working-class suburbs.

And with the cost of living rising faster than wages for many, and little relief in sight, it is likely that our markets will remain fragmented, with on the one hand first home owner suburbs and lower socio-economic areas being more affected by high mortgage costs and higher rent, while on the other hand gentrifying and aspirational suburbs where the locals can afford to, and prepared to pay to live likely to outperform.

Silver Lining

But there is a silver lining

Nevertheless, every challenging period offers a silver lining, and this one is no exception.

Property investors have been handed an opportunity to take advantage of a new property cycle.

And an opportunity like this doesn’t occur very often.

The last few years have provided a stark reminder that inflation destroys purchasing power and that investors must carefully consider which asset classes offer the best long-term protection against this force.

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